How to Prevent and Fix Common Sales Tax Mistakes
- Sep 9, 2015 | Suzanne Kearns
The collecting, filing, and paying of sales taxes is serious business. Just ask Todd Bates, the owner of a storage facility in Florida. Mr. Bates failed to pay the state $10,000 in sales tax that he collected from customers and last month, he was arrested and now faces five years in prison, plus fines and repayment.Todd isn't alone in his failure to file and remit sales tax. From Georgia to Tennessee to New York, business owners that file to take sales tax responsibilities seriously find they can only dodge the state and local tax authorities for so long.
We believe most business owners don’t collect and keep sales tax on purpose. Everyone makes mistakes, however, and it is common for sales tax responsibilities to be overlooked when running a business. Mistakes, like failing to remit sales tax, however, can lead to fines and penalties from your state especially if it is an ongoing trend. For example, if you live in Pennsylvania, you will pay 5 percent a month from the date the sales taxes were due until they’re paid.
Jim Frazier, known as The Sales Tax Guy, says that when you make a tax mistake, you need to get professional help. Your goal should be to prevent sales tax errors from occurring in the first place so you’ll be able to avoid monetary fines, penalties, or (gulp) jail time.
Here are some of the ways to ensure you never make a sales tax mistake.
Review Your Transactions Regularly
If you wait until the last minute to check your sales tax transactions, you’ll be less likely to catch errors, especially with the quickly changing sales tax laws that exist in most states. Instead, set aside some time every week to review your transactions and make sure there weren’t any errors. This will allow you to remit your forms early, minimizing the chance of an audit.
Know Where You Have Nexus
Ask most people about sales tax nexus, and you’ll quickly see their eyes begin to glaze over. It’s not exactly an exciting subject, but it’s crucial that business owners know where they have nexus, especially ecommerce business owners who sell in multiple states. If you're using a fulfillment service like Amazon's FBA program or Shipwire, you may have product stored in multiple states. And with the recent changes in nexus laws that make it easier for ecommerce businesses to trigger nexus, it’s more important than ever to understand your exposure.
In order to avoid this mistake, make sure you understand where you have nexus and register to collect sales tax in those states. Need help? Avalara Professional Services can perform a complete nexus study to help you understand your nexus exposure.
Stay Up-to-Date on Tax Laws
The ever-changing landscape of tax laws makes it difficult to stay on top of new laws and how they affect your ecommerce business, but it’s necessary if you’re going to stay in compliance and avoid tax mistakes. For instance, if you live in Virginia and personally use items from your inventory that you bought with a sales tax exemption, you owe use tax, and not reporting it could trigger an audit.
To stay on top of the changes, you can stay abreast of recent tax legislation in all states where you have nexus, hire an accountant to do it for you, or automate the process by using software like that offered by Avalara.
Stay on Top of Sales Tax Exemptions
When you allow a purchaser to buy tax-free goods from you, it’s your responsibility to make sure they have a legal and up-to-date exemption certificate. If the purchaser's certificate is expired or invalid, you could be held responsible for the uncollected sales tax.
You will need a system that keeps track of all sales tax exemptions and alerts you when they are about to expire.
Address Errors Immediately
If you discover that you’ve made an error in your sales tax transactions, you should address the situation immediately. For example, if you’ve been overcharging customers on sales tax, issue refund checks to them as soon as you discover the error, and then file a claim with the appropriate states for a refund. On the other hand, you could wait for an auditor to discover the error, in which case you'll be responsible for the fines and penalties.
Sales tax compliance is getting trickier by the day as state laws change in an attempt to make up for their budget shortfalls. Don’t let the new laws cause you to make a sales tax mistake. Instead, consider automating this part of your enterprise so you can concentrate on what you do best---growing your business.