Sales tax essentials for small business: Jurisdiction pitfalls to avoid
- May 5, 2016 | Shane Ratigan
As a small business, collecting sales taxes can be an unwelcome chore at best and overwhelming at worst. Figuring out which taxing jurisdiction covers your sales is an essential starting point. While this can be very obvious if you have a simple situation, the more complex your business, the more complicated jurisdiction can become. Incorrect calculations based on the wrong jurisdiction can increase your audit risk and possibly cost your business time and money.
There are some common situations that can result in using the wrong rate because of a jurisdiction error. Keeping an eye out for these can help you avoid pitfalls.
Keeping it local
If you have nexus in just one state, you only need to pay the state sales tax rate, plus any applicable local tax rates as well. While some states, including Connecticut and Maryland, have only a single sales tax rate, 38 states have numerous local tax jurisdictions that need to be taken into account when figuring your tax rate.
Not only that, but in some states that do not have statewide sales tax, such as Alaska, local jurisdictions may levy their own sales taxes.
What if you aren’t keeping it local?
The historical status quo in state sales tax is that merely making online or remote sales to customers in another state generally does not create a requirement for a seller to collect sales tax in that state. The requirement to collect comes from having created nexus by having some sort of physical presence in a state, such as an office, employees, or property. However, the current status quo is complicated by the many ways to create nexus.
In addition, states are getting very aggressive in their efforts to collect more sales tax revenue. South Dakota, for example, is only the latest of several states that have created a tax obligation for remote sales. South Dakota’s new law requires sellers to register and collect their sales tax if they have either more than $100,000 in sales at least 200 sales of tangible personal property or services delivered or transferred electronically to South Dakota customers.
States are also increasingly adopting click-through nexus laws, meaning that if an organization in a certain state refers sales to you via links, and you compensate that organization for those sales, you could be obligated to collect tax on sales in that state.
Knowing whether you have nexus or not is key to knowing which state tax jurisdictions apply to your sales—and it takes close scrutiny of the rules in any states where you think you might possibly have nexus.
Please tell me you aren’t relying on ZIP codes.
Determining sales tax by ZIP codes may not always give you the right results. In many places, a single ZIP code can include more than one city or taxing jurisdiction and multiple sales tax rates. In Colorado, for example, the ZIP code 80111 includes at least five different sales tax rates.
Even bigger businesses don’t always get this right. Residents of Matanuska-Susitna County, Alaska, who lived outside Wasilla city limits were incorrectly charged the city sales tax rate of 2% (on telephone, internet and cell services) for over two years due to a shared ZIP code for unincorporated and incorporated addresses.
Sales tax solution
Though the concept of a sales tax jurisdiction can seem simple on the surface, getting it right can be easier said than done. How can you make sure that you get the right sales tax jurisdiction and rate for every single sale?
One solution is automated sales tax software such as Avalara’s AvaTax. AvaTax integrates seamlessly into the most popular accounting and ecommerce solutions to provide 100% accuracy guarantee sales-tax calculations based on the latest rules, rates and boundaries. AvaTax for Small Business automatically knows the right jurisdiction through precise geolocation and calculates the right amount of sales tax that you need to collect.