How to Choose A Sales Tax Solution for Small Businesses
They may not have the high visibility of their big business counterparts, but over 90 percent of American businesses fall into the category of “microbusinesses”: companies with five employees or fewer.
The owners of these businesses often do it all — from marketing to shipping, filling out forms to depositing cash. The sheer number of government regulations and requirements can be daunting to these business owners. One of the most potentially confusing areas of regulation? Sales tax.
In this guide, you’ll learn about different types of sales tax solutions. Rather than pointing you toward any one solution, you’ll learn how to evaluate your business’s needs and how to identify the best way to solve your pain points.
Why change what we do now?
Which microbusinesses should consider a change to their sales tax solution? Many business owners are slow to change the way they do sales tax — people like sticking with what they know. But if any of the following applies to your business, it could be time for a change:
- You sell goods or services, but haven’t yet registered to collect sales tax.
- You registered to collect sales tax, but have not collected it or collect it inconsistently.
- You collect sales tax, but have had difficulty completing sales tax returns.
- You complete sales tax returns, but have to ask for extensions or incur late penalties.
- You are considering expanding out-of-state, or have already begun your expansion.
- Your company may start growing — or has already grown — to include attending trade shows, drop shipping, or other out-of-state activities.
- You’re paying a CPA or other accounting professional to file your sales tax returns.
- You’ve started spending more time or money on sales taxes than you used to.
- You’ve changed your accounting software.
Step one: learn about sales tax challenges
Before you take a closer look at specific solutions, it’s a good idea to have a general outline of the problem you’re trying to solve.Filing returns and remitting taxes can be a pain point for many microbusinesses. Whether they’re paying an accountant or make sales tax returns a DIY project, many microbusiness owners find that filing requirements cost more time and money than they’d like.
There are over 12,000 sales tax jurisdictions in the United States alone, and many don’t follow city boundaries, county lines … or even zip codes. Each jurisdiction has its own tax rate, and taxability rules are modified frequently. Because sales tax revenue is seen as low-hanging fruit, cash-strapped local and state governments have become stricter about enforcement and auditing in recent years.
Service microbusinesses often don’t charge sales tax at all because they believe services are exempt. While some states exempt most or all services from sales tax, an increasing number have started taxing a wide array of services.
Growth and expansion are the goals of every microbusiness owner, but new sales tax challenges emerge with new business activities and a broadening customer base. Compliance activities can quickly expand to fill all available time, and even careful, math-oriented business owners can make costly mistakes.
Step two: evaluate your options
Options for sales tax compliance could include DIY solutions, hiring an accountant, or outsourcing sales tax tasks to automated software.
For each solution you consider, keep the following questions in mind:
- Can I rely on this solution to be error-free and prevent audit trouble?
- Does the solution integrate with my existing accounting software?
- Will this solution free up time so I can spend it on core business functions?
- Is support available when I have questions?
- Does the solution meet my budgetary needs?
- Will this solution scale with my company’s growth? What about if we expand beyond our state, or even internationally?
Step three: choose your sales tax solution
After considering your options, it’s time to figure out which one will best meet the needs you outlined during the first step.
Make sure to do a fair comparison of costs, keeping in mind that more automation (and less work for you) doesn’t necessarily mean more expensive.
Compatibility with your current software is important, but so is compatibility with a wide range of ecommerce and accounting software. Remember, you may not use the same tools forever, so versatility is key for your sales tax solution.
No matter what solution you choose, the single most important consideration is how well it will grow with your business in the future. Minimizing compliance “growing pains” ensures that tax rules won’t hold your business back.
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