Don't Let Sales Tax Slow Down Your Startup
- April 24, 2015 | Ryan O'Donnell
When you're launching your business, your instincts might tell you not to worry about sales tax until you've actually confirmed a few sales. Rational as this may seem, it's actually a recipe for disaster. The time to start thinking about sales tax is before you begin to incur such taxes, so that you've got everything prepared and you don't need to worry about any nasty surprises when your business is beginning to take off.
Sales tax can seem especially labyrinthine, even compared to other taxes, but with good planning and robust record-keeping, you shouldn't have any problems. Here are a few questions you need to ask yourself before you begin trading:
1. Do you know your Sales Tax Nexus?
The concept of nexus seems straightforward enough: if you have a significant presence in a state, and that state has sales tax laws, you are liable to file within that state. Obviously, your company's home state falls within that category. If you have branches, warehouses or other business properties in a separate state, then it's very likely you also have nexus in those states.
Where it gets complicated is how you define a presence. A traveling salesperson who frequents another state will give you nexus in that state. A worker who telecommutes will as well, even if their official office is in another state. If you regularly travel to meet clients at their location, you may be deemed to have a presence in their state. Having an out-of-state data center or using certain B2B services may also impact your tax exposure.
It's best to keep these facts in the back of your mind from day one of your new business. Then, when you have any kind of interactions across state lines, your first question can be, "Will this give me nexus in that state?" If in doubt, you can speak to the local tax authority in that state, who will let you know for sure.
2. Are you registered to collect sales tax?
Now that you've figured out your sales tax nexus, the next thing is to make sure that you're actually authorized to collect the tax when you transact. Doing so requires you to apply to the tax authority in the relevant state for a sales tax permit or sales tax license, which gives you permission to charge this tax to your customers.
Rules vary greatly across states. For example some states require you to renew your sales tax permit periodically, while others give you a once-off certification. While implementation varies, the basics are the same: you must be authorized by the relevant authority before you can begin collecting taxes.
Review our state sales tax guides if you need help.
3. Are you collecting the correct amount of sales tax from your customers?
This is where it becomes really complicated. Firstly, some states require you to charge according to the origin state, which is the rate applicable at your head office. Other states require you to charge according to the rate appropriate to the buyer's address. And you need your customer's full address (including zip code), because individual municipalities can add an additional sales tax, on top of the state's base rate. Also, some states say that shipping charges are taxable, while other states don't.
Calculating this can be incredibly complex. If you're selling through an online system such as Etsy or eBay, they will automatically calculate the sales tax and add it to the final payment. If you're transacting with customers directly or through your website, it's essential that you have a reliable software solution for making these calculations.
4. How are you storing payments received in respect of sales tax?
This is especially important at the startup stage of your company, when cashflow can be erratic. You are charging your customers the appropriate tax, and eventually you are handing that money over to the taxman. But where does the money sit while it's in your possession?
Keeping everything in a single account is asking for trouble, and even if you resist the urge to spend it, it's possible that some other banking transaction may eat it up. The simplest solution is to keep a separate account into which you can divert all sales tax-related payments, so that it's ready when it's time to file.
5. How and when are you filing sales tax returns?
You may choose to file annually or prefer to get it away each month. You might have a preference to file online, or to send a check with a stack of invoices. Whether or not you can do this is up to the individual states. The good news is that many remittance systems are improving as technology advances, with a number of states offering sophisticated online systems for filing, as well as flexible options for regularity of remittance.
With Avalara TrustFile, you can break down the sales tax you collected by jurisdiction to make the filing process fast, accurate, and simple. Sign up for your free account today!
When you're filled with the energy of a new project, it can be a chore to step back from your new business and think about sales tax planning. But thinking about these things now can save you an awful lot of pain further down the line. You need to be regularly reviewing your tax handling systems and considering sales tax exposure, so that you've don't need to worry about that stuff when your business is really starting to take off.