The Supreme Court’s recent decision in South Dakota v. Wayfair has redefined sales tax, and every business selling online will need to assess its impact. Interpreting the implications of new policies across different states is far from the only sales tax challenge small businesses will face in 2018. Changing tax rates and rules, along with transaction and invoice data residing in multiple systems, will continue to complicate sales tax for the remainder of the year and beyond. As a result, many small business owners and operators are struggling to keep up with filing correctly.
There’s a better way. Here are nine tips to help your company avoid costly errors and audit headaches — and focus on growth and success.
1. Understand each state’s tax laws and know your nexus
According to the Sales Tax Institute, nexus historically has always been associated with a physical presence, and physical presence was the determining factor of whether an out-of-state business selling products into a state was liable for collecting sales or use tax on sales into the state. That all changed in June 2018 when, in South Dakota v. Wayfair, the Supreme Court ruled that physical presence was the wrong test and an “extensive virtual presence,” not physical presence, is sufficient for creating nexus. As a result, more states have started to pass sales tax laws and regulations imposing sales tax collection obligations based solely on the amount or number of sales made into their state. This is a tremendous change from the past and makes understanding your nexus in each state more important than ever. Nexus laws can be quite complex, and they differ from state to state.
With change the only constant, you must put in place a clear process for tracking evolving sales tax laws in each state and then identify the impact on nexus.
2. Heed changing filing requirements
Each state sets its own requirements for business sales tax filing and payments, with some states now requiring e-filing, especially for businesses with large tax liabilities. Only by knowing the available payment options and requirements in each state where your company has nexus can you avoid costly and time-consuming errors. For more information about filing and payment options for each state, go to www.taxrates.com/state-rates/.
3. Track required prepayments
More than 15 jurisdictions (at last count), including Pennsylvania and New York, require prepayment from some businesses. The larger the sales tax liability, the more likely you will need to prepay. Prepayments are typically made on a monthly basis but can sometimes be required as often as four times a month. To ensure accurate and on-time prepayments, you must develop a flexible filing schedule and update it regularly to capture changes.
4. Reconcile your sales tax payable account
To ensure accuracy over time, regularly reconcile your sales tax payable account with your source documents. Here’s how:
- Identify the balance of your account at the beginning of the accounting period.
- Add the total amount billed to customers.
- Subtract the total sales and use tax paid, either electronically or by check, and account for any discounts a state may offer for filing on time.
- Reconcile this amount with the current balance of your sales tax payable account.
5. Regularly confirm filing frequency for each state
While you will likely be notified months in advance when a jurisdiction is changing its filing frequency for sales and use tax returns, you need to be aware of the change whether you receive a notice or not. Historically, states sent all such notice by U.S. mail, but with their new software systems, some have taken to posting a message in your account. While it has always been critical that you open any mail you receive from a state, it is now critical that you regularly check your electronic account at the state. This means you must develop a process for proactively confirming the current frequency in each state. Since filing frequencies change often, you can confirm your current frequencies at www.taxrates.com/state-rates.
6. Accurately tax new products
With all the differences among states, it should be no surprise that different states have different rates for different products — and the same product may be taxable in one state while exempt in another. Not only do states tax different products, they often define the same product differently from each other.Make sure you identify the unique laws in each state that apply to your new products. If you are moving into a new state, do not assume your existing tax rates apply. With the expected increase in new tax laws due to the recent Supreme Court decision, this is a particularly important area to pay attention to.
7. Stay current with exemption certificates
Inaccurate, missing, or expired tax exemption certificates are a major cause of audit assessments. Regularly verify that each customer’s tax-exempt status agrees with the term of the exemption certificate you have on file — and replace any certificates that are not current. If you have changed your company name or acquired a new company, you may need to obtain new exemption certificates from every customer. Confirm the requirements with each state.
8. Respond to notices promptly
Failing to respond to notices promptly can result in a levy against your bank account, a lien on your corporate officers or suspension of your business license. Notices can inform you of tax rate changes or changes in what is taxable or exempt. Notices can also result from your error in calculating or sending a return or from a jurisdiction’s error in processing your return or payment. In either case, not responding can only make the situation worse. Once again, you need a clear process in place for handling and responding to any notice from a sales tax jurisdiction.
9. Use exact location, not ZIP codes
Each local jurisdiction is defined by a variety of (often complex) criteria, and it is common to have multiple sales tax rates within a single ZIP code. As a result, relying on ZIP codes for sales tax rates can lead to applying the wrong rate, leaving out a special district tax or remitting sales tax to the wrong jurisdiction — all leading to possible audits, penalties, and return reconciliation. The only way to ensure the reliable identification of transaction jurisdictions is to determine the exact location using geolocation software that relies on longitude and latitude coordinates.
Audits and Automation
With states trying hard to collect unpaid taxes to help balance their budgets, it is possible you will face an audit in the near future. Taking the time now to review and strengthen all the processes noted above would help you minimize the cost of an audit and the possibility of errors. However, doing all this manually will almost certainly place an extraordinary burden on your business.
Solutions for automating sales tax collection, filing and payment can eliminate all the complexity around sales tax compliance and audit preparation in different states. With automation, you can spend less on bookkeeping, and automatically calculate and report sales tax correctly across your accounting software, marketplaces or e-Commerce platforms.
Scott Peterson is the Director of Government Affairs for Avalara, Inc. In his role he leads Avalara’s effort to be the first name in sales tax automation. Prior to joining Avalara Peterson was the first Executive Director of the Streamlined Sales Tax Governing Board. For seven years he acted as the chief operating officer of an organization devoted to making sales tax simpler and more uniform for the benefit of business. Before joining Streamline Peterson spent 10 years as the Director of the South Dakota Sales Tax Division, where he was responsible for the state sales and use tax, the state’s contractor’s excise tax, the sales and use tax for over 200 cities, and the sales and use tax for four tribal governments.