5 Tips to Get Started on Collecting Sales Tax
- Sales and Use Tax
- December 7, 2016 | Scott Peterson
Already in business but need to start collecting sales tax? Here are 5 steps for small businesses.
You’ve been sailing along, business as usual when you realize that you need to start collecting sales taxes. It can be an intimidating position, especially when you’re a small business with limited time and resources. So where do you start? Here are 5 steps that will get you on your way to sales tax compliance.
1. Get set up for sales tax as soon as you can
Once you realize that you need to start sales tax compliance, don’t delay. If you fail to collect sales tax when you should, you will face fines and penalties, and these will only grow over time. For instance, you could incur a penalty for every single sales tax return that you should have filed but didn’t, with interest that compounds until you pay. Failing to address this means you will only have a bigger bill down the road.
The consequences can be even more serious if you collect tax without proper registration, as you may face criminal penalties. It’s even more serious if you collect sales tax without remitting the amount you collect. This may be considered fraud in many states.
Time is of the essence. Taking the steps to get on track with sales tax as soon as possible is the most important thing you can do in this situation to protect your business from negative fallout. Putting it off can only lead to more damage.
Getting outside advice, such as hiring an attorney or CPA, can be invaluable at this point so that you can deal with any consequences of past practices and make sure you are getting things right going forward.
The upside is that getting started on sales tax may not be as difficult as you may think. You can generally take care of most sales tax-related processes online, including payment. And most states keep registration fees fairly low in order to encourage businesses to comply.
2. Determine your nexus
When you are embarking on sales tax compliance, it’s crucial to know where you have nexus. Nexus is a relationship with a state (or locality) that results in an obligation to collect sales tax on transactions there. You will always have nexus in the state/city where your business is physically located.
However, on June 21, 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. that physical presence is no longer the only prerequisite for tax collection: Economic and virtual activity in a state can trigger nexus, too. Approximately 20 states have economic nexus laws, and more are looking to adopt it. You can find up-to-date information about the ruling and its potential impact on your businesses here.
And there are other ways to create nexus, especially as states get more aggressive in efforts to collect more tax revenue and expand the definition of nexus. You will need to look carefully at the nexus rules for any state where you do any kind of business to see if you have created nexus there.
Nexus-creating situations may not always be obvious. Depending on the state, nexus can be created through online affiliate relationships or by using a drop shipper/distributor or storing goods in a different state (which can occur when sellers are working with Amazon, for instance). Attending a trade show or a selling event or employing workers in other states can also trigger nexus. Every state is different, so it’s important to check the requirements for each individual state.
The volume of your sales can also determine whether you need to collect sales taxes. In certain states, even if you have nexus, you may not be required to collect sales taxes if your sales are very small or infrequent. For example, many of the new economic nexus laws take effect only after a remote seller has $100,000 in sales in a state, or 200 or more separate transactions.
3. Determine product/service taxability
Once you have determined where you have nexus, you need to know whether the products and/or services that you are selling are taxable in the places you have nexus. Generally, most products that are sold to end consumers are taxable, but there are plenty of exceptions. Again, the rules are different in every state, so even if a product you sell is exempt in one state, it may not be in another.
Taxability rules also vary widely for clothing. An article of clothing may or may not be considered taxable depending on its function and value. In Connecticut, for example, apparel priced under $50 is exempt, while apparel that costs $1,000 is subject to a luxury tax.
If you are providing services rather than selling goods, don’t assume that your transactions are not taxable. A growing number of states are imposing sales taxes on services. Recently, for example, Washington state imposed sales taxes on physical fitness services; Connecticut now charges sales tax on car wash services; and North Carolina changed its laws to make shoe repair services subject to sales tax.
4. Establish a good record-keeping system
Set yourself up for success in sales tax compliance by creating a record-keeping system that clearly shows where and when your transactions take place and how much tax you collect on those sales. Having the right records — and being able to easily find them — is crucial when it’s time to file. Those records are also your proof that you’ve complied with sales tax rules.
Beyond transaction and sales tax collection records, setting up a good system to keep track of exemption certificates is also important. Make sure that exemption certificates on file are easy to find and that you’re aware of when they expire.
The good news is that you don’t necessarily need to design your own record-keeping/data systems from scratch. Automated systems can be valuable tools, especially for small businesses without a lot of extra time or resources.
5. Register and file
Once you know where you need to file and whether your products/services are taxable, and you have a system in place to keep track of tax collected, it’s time to register with the states where you have nexus. As with anything related to sales tax, the process is different in each state.
While some states require just one registration form to collect tax in the entire state, some local jurisdictions in home rule states, such as Colorado, have their own individual registration requirements.
However, all states offer online registration, and it’s free in the majority of states. Others charge fees ranging from around $5 to around $100.
If you do business in several states, you may want to look into Streamlined Sales Tax (SST) registration. In the 24 states that participate, you can use one registration form to automatically register in all SST states. This can save you time and money, but if you are only doing business in a few SST states, it may not make sense.
Once you’re registered and you start collecting, you’ll need to start filing sales tax returns. You’ll be assigned a filing frequency and deadlines. These can range from monthly to yearly, depending on the amount of sales tax that you collect. You’ll need to submit your completed sales tax returns and pay the taxes you’ve collected by these deadlines to avoid penalties.
You’ll also need to file any delinquent returns and pay any sales taxes that you might owe, along with any penalties that might apply. Again, the sooner you take care of this, the lower your bill will be.
Sales tax help for small businesses
Automated sales tax solutions, such as Avalara AvaTax, can be a huge help to small businesses, especially if you’re just starting out with sales tax compliance. AvaTax integrates seamlessly into your shopping cart or accounting system and calculates the correct sales tax rate for you. And the TrustFile solution can make generating and filing sales tax returns a snap. Special pricing makes these solutions extremely affordable for small businesses while saving time and trouble. Learn more here.