If you’re an online business owner or work for an e-commerce store, you likely have to deal with sales tax in some way or another. You’ve just opened your online store and are excited to get it up and run. But now, you have to deal with sales tax compliance, which can be a real headache.
It can be a pain to know that the challenges of entrepreneurship don’t end after filing your e-commerce business registration, but don’t worry, you’re not alone. Thousands of entrepreneurs have to deal with state and local sales tax compliance every day.
But if you want to stand out from the crowd and get ahead of your competition, you need to know all about sales tax. Here’s what you need to keep in mind to ace your state and local sales tax compliance. The most common sales tax compliance pitfalls that online businesses often fall into are:
Pitfall #1: Confusing “sales tax nexus” and “use tax nexus”
Some states allow companies to establish a “use tax nexus” or physical presence in the state without showing a “sales tax nexus.” Confusion around these concepts can be avoided by closely reviewing each state’s requirements for establishing both types of nexus. Here is where you can get information about whether nexus has been established for online businesses in each state.
How to avoid it: Ensure that you are state registered for sales and use tax in all states where your business has a physical presence or does or will do a substantial economic activity. Nexus is determined by the location of your company, not the location of your customers.
Pitfall #2: Not charging enough
If you’re not charging customers the right amount of sales tax, you may be missing out on some much-needed revenue. Several factors determine how much sales tax to charge for products and services, such as the type of product being sold, the location of the business, how much the business owner pays for inventory, and other variables.
How to avoid it: Contact a tax professional or review your state’s “use tax” laws to determine the correct amount of sales tax to charge customers. This way, you’ll ensure no tax gaps, and you’re collecting the most sales tax revenue possible. And because it’s required by law in most states, you should also be filing a quarterly sales tax report, even if you haven’t collected any sales tax.
Pitfall #3: Charging too much
Overcharging customers can lead to bad PR for your business, not to mention generating unnecessary controversy with the states aware of this mistake. In most states, it is illegal to charge customers sales tax on the state rate when no sales tax has been collected.
How to avoid it: Contact a tax professional if you need help determining the correct amount of sales tax to charge for products or services. Ensure that you’re not overcharging customers and getting yourself into trouble with the states. This way, you’ll avoid unnecessary and costly fines or penalties.
Pitfall #4: Not correctly remitting sales taxes to the state
If you’re not paying your collected sales tax to the relevant states on time, you could face some costly penalties. Many companies have been surprised by hefty fines after being audited by states they previously had no contact with because the tax was due but not paid.
How to avoid it: Make sure that you’re remitting all collected sales taxes on time and filing any necessary tax returns regularly. This way, you’ll avoid paying any penalties that could have been avoided because you weren’t complying with your state’s reporting requirements.
Pitfall #5: Not following sales tax rules
Avoiding these five common sales tax pitfalls will help ensure your compliance with state and local sales tax laws. Of course, there’s always the chance of making a mistake, but by knowing what the common pitfalls are and how you can avoid them, you can help ensure that your online business stays in compliance.
How to avoid it: Make sure that you’re aware of your own state’s laws or any relevant changes to the law, remit all collected sales tax on time, and consult with a tax professional if you have questions about your specific situation. Another smart move is to keep all records of sales tax transactions for at least three years. Failing to do so could make it impossible for you, or the states, to determine how much sales tax is due or has been collected.
By learning about the most common pitfalls of sales tax compliance, you will now be better equipped to avoid them. But if you find yourself falling into one or more of these traps, don’t worry — you can still get back on track.