Five sales tax compliance tips for startups

Avalara Whitepaper

It's never too early to develop a sales tax compliance strategy

Debates over online sales tax, and related statutory rules and rate changes, have vaulted sales and use tax compliance to the top of every savvy businessperson’s action list. For startups, it's never too early to research your sales tax collection and filing obligations.

Understanding how to implement safeguards and systems, monitor widely varying statutory rules, and find efficient ways to collect and remit the right sales and use tax to the right jurisdiction at the right time, can flummox even the most compliance-minded entrepreneur.

Use the following five tips to identify steps your business can take to address your particular sales tax challenges. Developed by Avalara sales tax experts, these are a starting point, rather than an exhaustive strategy, for addressing sales and use tax compliance.

For more information on auditing your business, be sure to download a copy of our sales and use tax audit checklist.

Tip #1 — Determine tax liability by analyzing changes to nexus rules

While most businesses have some concept of nexus—the connection between a business and a taxing jurisdiction requiring sales tax collection and remittance—many are unaware of the recent (and dramatic) changes that have taken place.

On June 21, 2018, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. The decision overruled a longstanding physical presence rule, allowing states to require remote sellers to collect and remit sales tax.

Since Wayfair, most (but not all) states have adopted new rules defining what establishes nexus. Unfortunately for businesses, no two state sales tax nexus laws are alike.

If you're an out-of-state seller, you need to have a thorough understanding of the business activities that may trigger nexus in states into which you are selling. To do otherwise is to put your startup at significant risk of failing to collect and remit required sales tax.

Recommended steps to take

  1. Review where you currently have nexus and identify applicable rule changes
  2. Make sure your business is registered in states where it’s required
  3. Determine whether your business might have unknowingly created nexus in a jurisdiction: using traveling sales people that physically enter a state to conduct business, utilizing contract labor, owning or leasing real or personal property in a state, participating in trade shows, or other nexus-creating activities
  4. Avoid practices that put you at risk for audit: having out-of-date rates and rules, failing to recognize new rules that create remote seller nexus, or using error prone manual processes to manage unwieldy sales and use tax laws and rates
  5. Watch the Avalara Nexus 101 Webinar

Tip #2 — Stop ignoring consumer use tax

Use tax is defined as a tax on the use of tangible personal property (TPP) not otherwise subject to sales tax. Generally speaking, a purchaser owes use tax on taxable items purchased on which they paid no sales tax or less tax than the applicable sales tax rate.

Unlike sales tax, the remittance responsibility lies with the buyer (either a business or an individual). In some cases, the purchaser would be a business, such as a manufacturer or a distributor, buying goods outside the state or online, to use, or consume as TPP. Use tax must also be paid when a business withdraws goods from inventory for its own use, if sales tax was not paid on those items at the time of purchase. It is the responsibility of a business to self-assess when, and if, use tax is accrued and to pay the state and/or local tax authority on a tax return.

Recommended steps to take

  1. Develop a written use tax policy
  2. Avoid practices that might increase your risk of audit: failing to accrue consumer use tax, using inventory purchased for resale for your company’s own use without remitting sales tax to a vendor or use tax to the state.

Tip #3 — Understand changing exemption certificate rules

Eventually, every startup selling taxable goods encounters a tax-exempt customer. There is a long list of criteria that allows goods to be purchased tax-free. The complexity for start-ups comes from having to track these customers in order to validate the lack of sales tax to state and local tax authorities. For this, businesses need to collect, store and manage sales tax exemption certificates.

Recommended steps to take

  1. Create an audit trail for certificates
  2. Be sure to update product and service exemption rules in each jurisdiction in which you do business
  3. Be able to quickly generate an exemption certificate summary report
  4. Avoid these exemption certificate-related practices that might increase your risk of an audit: inability to quickly generate a summary report, inaccurate, incomplete and missing certificates, or expired certificates
  5. Review our Sales Tax Exemption Certificate Survival Guide

Tip #4 — Know when, where, and how to remit sales and use tax returns

Even companies that work hard to accurately track and update changes in sales and use tax rules, boundaries, and rate changes often fail to remit their liability correctly. Knowing which form to use, where to file, and what to include in your returns, can be an onerous task.

Recommended steps to take

  1. Review whether your filing schedule has changed, keeping in mind the schedule generally relates to your business revenue
  2. Find out whether the states where you have to remit sales tax have implemented new e-filing laws
  3. Avoid these filing errors that might increase your risk of an audit: failure to prepay where required, late payment, or payment to incorrect jurisdictions

Tip #5 — Get help from a tax professional

Startups trying to accurately collect, file, and report sales and use taxes face an uphill battle. Choosing to ignore sales tax obligations or guessing at the right path to take will only lead to long-term issues. Work with your accountants, seek advice from the management team at your incubator or work through the steps outlined below.

Recommended steps to take

  1. Note the 2020 sales tax holidays
  2. Avalara Nexus 101 Webinar
  3. Visit the Avalara Resource Center for more helpful tax compliance content
  4. Determine whether your company needs a Voluntary Disclosure Agreement

Reduce tax risk

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