When Online Sellers Should File Sales Tax
- January 22, 2015 | Ryan O'Donnell
One of the most common sales tax compliance questions we hear from online merchants is, "When is the right time to begin filing sales tax?" The answer isn't as simple as, "Right away!" It is up to every business owner to review their tax situation and make an educated decision about the right time to begin reporting sales tax.
In this post we'll talk about how online merchants can objectively look at their business and the sales tax they've collected and make a well informed decision about the right time to file sales tax returns in states where they have nexus.
Where Do You Have Nexus?
Every state that charges sales tax requires businesses collecting this tax to register with the state taxing authority. Business owners should identify where their business has nexus so they understand the states in which they should be collecting sales tax. If you only have a "significant presence", and therefore, nexus in your home state, then the answer is simple - you only have to collect sales tax in your home state (assuming your home state isn't one of the NOMAD states). However, be sure you have a complete understanding of what constitutes a "significant presence" because it varies by state and by industry. Need help? Contact Avalara Pro Services for a comprehensive nexus study and analysis.
It's important to remember leveraging a fulfillment service such as Fulfillment by Amazon or Shipwire will likely result in your product being located in various warehouses scattered around the United States. Consequently, you will have nexus in those states and each state's Department of Revenue has the right to require your business to collect, file, and remit sales tax.
If the thought of having to manage sales tax exposure in a number of states has you worried, you're not alone. It's a very common question we hear from small business owners and startup entrepreneurs all the time.
However, in taxes, as in life, nothing is black and white.
Just because a state would assert that your business has a technical obligation to remit sales tax does not mean you absolutely should. It's important to always consider the cost of compliance and the overall liability and make an educated business decision. It's important to remember, the cost of compliance should never be greater than the potential liability accrued.
Exactly when should a business begin to file state sales tax returns? We're sorry to say there is no right answer to this question. However, we can offer some guidelines to help you make your decision. Let's take a moment to consider an example.
Amazon Seller Example
Suppose you've set up an Amazon store selling taxable goods and you have elected to participate in the Fulfillment by Amazon program. Your business is just getting started and, for the first two months, you've sold $300 worth of goods in Florida where you have product stored in an Amazon Fulfillment Center.
The fact that you have product in Florida and are selling taxable goods to Florida residents means you definitely have an obligation to collect sales tax and file sales tax returns with the Florida Department of Revenue. However, what's the best business decision? Let's look at the numbers.
- Monthly Sales = $1000.00
- Florida Sales Tax Rate = 6% (estimated...we're not including local taxes)
- Monthly Sales Tax Collected = $60.00
Suppose 36-months down the road, the Florida Department of Revenue audits your business. During that time the sales and tax you've collected has stayed constant.
- Total Back Sales Tax Owed = $2160.00 (36-months at $60 per month)
Finally, we'll assume the total penalty and interest is 25% (this is a guess, but we're guessing high so it's likely the actual percentage is lower).
- Total Back Sales Tax, Penalties, and Interest = $2700.00
- Total Penalties and Interest = $540.00
Your business owes the Florida Department of Revenue $2160 in back taxes as well as a fine of $540.
Manual Preparation: If you're preparing and filing your sales tax returns, then you might think registering and filing is a no-brainer given the $540 risk associated with the uncollected sales tax. However, don't forget there is always an opportunity cost associated with time (and managing sales tax manually can certainly be time consuming!).
Tax Professional: If you're hiring someone to file your sales tax returns, then your likely paying someone anywhere from $20 - $200 per month. Suppose we choose a rate somewhere near the low end. Let's say $50 per month. That equates to $1800.00 (36-months at $50 per month) to have a tax professional manage your sales tax exposure.
This is where the real challenge lies for small business owners. Being in compliance with state taxation laws can help you sleep better at night, but it's difficult to justify the cost of hiring a tax professional to manage your sales tax exposure and it's also a time consuming hassle to do it yourself.
This is where TrustFile can help fill the gap. By importing your transaction data, we can do the heavy lifting of breaking down sales tax by jurisdiction and save you time making manual sales tax management a quick and easy task.
A Growing Business
Successful businesses grow by selling more product and, as a result, collecting more sales tax dollars. Eventually, it will become a smart business decision to file sales tax returns. The trick is to understand your business and it's growth rate. That way you can anticipate when failing to remit sales tax becomes less of a prudent business decision and more of a gamble.
In Over Your Head
If you've already waited too long and have years of unremitted sales tax on your books, fear not! Every state taxation authority offers a Voluntary Disclosure Agreement (VDA) program to correct this oversight without ruining the business you've worked hard to establish.
A VDA is a program that offers taxpayers certain benefits from proactively disclosing prior period tax liabilities in accordance with a binding agreement. The key is to take action. If the state find you, a VDA is off the table.