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7 Sales Tax Bookkeeping Tips to Help Your Small Business

  • Sep 3, 2015 | Lee Polevoi

Collecting sales tax from your online customers, then remitting it to the correct place at the right time is a responsibility you shouldn't neglect or handle improperly.

What makes you an expert in your area of ecommerce may have little to do with bookkeeping, but it's in your own best interest to be able to read and understand financial statements to avoid mistakes that could harm your business.

Here are seven tips to improve your sales tax bookkeeping practices and reduce the margin of error.

1. Become familiar with the basics

Learning the fundamentals "doesn't have to be painful or time-consuming," notes Etsy content manager Nadine Heintz. She shares the advice of financial expert Jim Chamberlain, who strongly recommends conducting basic research online, enrolling in an Accounting 101 class at a local community college, or asking your accountant for helpful tips. 

2. Invest in the right software

When it comes to sales tax and related matters, sales tax automation and compliance software is an online seller's best friend. These cloud-based software platforms are designed to address the sometimes bewildering (and ever-changing) arena of sales tax, specifically obligations revolving around exemptions, tax holidays, filing deadlines, reporting requirements, and so on. 

3. Make sales tax bookkeeping part of your everyday routine

James de Haan of MyCorporation urges online sellers who do their own bookkeeping to adhere to a regular schedule. "Every accountant I've talked to has said that, if you do your own bookkeeping, give yourself an hour or so at the end of every working day to ensure your books are up to date. That means keeping track of what's been sold, and any sales tax collected."

This sentiment is echoed by Zach Olson, CEO of Bookly. "Keep a running balance of sales tax collected," he says. "Your company's income statement should not reflect sales tax as part of the company's revenues."

4. Don't go by zip code alone

Along with other sales tax experts, Olson cautions against taking short cuts to determine the proper sales tax rate (for example, using only a zip code to determine the amount to collect).

"In some locations, there could be more than one sales tax rate in a single zip code area, so you'll want to use a full address to get the correct rates," Olson says.

5. Be clear about nexus criteria

Ecommerce sellers generally "get" the concept of nexus and understand they're legally obliged to collect sales tax in any state where they have sales tax nexus.

But the experts at Shopify remind us that a business can develop nexus in other states by having employees there, maintaining a warehouse to store inventory, or even "hosting a pop-up shop or selling at a craft fair." Other criteria to keep in mind include having an office in another state or using a third-party drop-shipper in a different state.

6. Make prepayments where necessary

Some jurisdictions require online sellers to prepay sales tax as it is collected or for larger tax amounts. To make matters more complicated, prepayments entail a filing schedule different from ordinary returns. So by remitting sales tax in a number of jurisdictions, you may find yourself managing several different filing schedules. 

Failing to make prepayments can result in significant penalties. If a jurisdiction alerts you to a late payment or related issue, don't hesitate to make contact and fix the problem before it gets worse.

7. Maintain complete and accurate sales records

A business sales tax audit is no one's idea of a good time. It's a good idea in general to maintain complete and accurate records of your sales transactions, but, notes Kris Merritt at AccountingDepartment.com, that's just a start: "These records need to be easy to access, and auditors should be able to match up all of the supporting documentation related to a sale with the initial transaction."

She also urges ecommerce providers to confirm that the check they send to the Department of Revenue hasn't vanished in the mail or been delivered to the wrong department. 

With the growth of your online business comes the need to be ever more vigilant in observing sales tax recording and filing requirements. It helps when you can call upon knowledgeable sources to make the process clearer and more manageable.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Lee Polevoi
Avalara Author Lee Polevoi