Don’t Fall Into These 5 Sales Tax Traps
by Mark Faggiano, on December 29, 2015
Author Mark Faggiano is the founder and CEO of TaxJar
Sales tax can be daunting. Because sales tax is administered by individual states, and it gets exponentially more complex as your business grows, snares and pitfalls can face you at every turn. But there’s hope!
We’ve compiled the 5 sales tax traps that snag eCommerce sellers the most. Avoid these big guys, and you’re all set for successful sales tax compliance.
Trap #1: Not Collecting Sales Tax in All Nexus States
You are required to charge sales tax to buyers in states where you have “sales tax nexus.” (This was all decided by the Supreme Court decision in Quill v. South Dakota, and “nexus” is just a legalese way of saying “significant presence.”) Most eCommerce sellers realize that they have sales tax nexus in their home state and thus must charge sales tax to their fellow buyers residing in that state.
The trap lies in the fact that some other common business activities also create nexus. You may have nexus in a state and not know it, and if you weren’t collecting sales tax from buyers in that state, you could fall victim to an audit, with its subsequent fines and penalties. Yikes!
These factors can potentially create nexus:
- A location – a store, office, warehouse, or even just storing inventory
- Personnel – an employee, contractor, salesperson or installer
- A drop shipping relationship
- A 3rd party affiliate
- Temporary sales – such as selling at a tradeshow or craft fair
To determine whether your business activities give you nexus in a state you can check your state here.
Trap #2: Failing to File for a Sales Tax Permit
If you have nexus in a state, you are required to register your business with the state by filing for a sales tax permit (sometimes called a sales tax license or, if you are based out of state, a “use tax” license.)
Don’t start collecting sales tax without your license in hand! States actually consider this unlawful. In their suspicious eyes, the worst-case scenario is that you are telling your customers you are collecting sales tax but really pocketing the funds for yourself. This is a criminal offense; so don’t forget to file for your sales tax permit, or else you’ll fall into this trap. Here’s how to register for a sales tax license in every state.
Trap #3: Tripping Up on Sales Tax Filing Due Dates
Income tax filing is fairly easy. The hard and fast deadline for individuals is April 15th. But sales tax deadlines aren’t nearly as neat. When you file for a sales tax permit your state will assign you a filing frequency of either quarterly, monthly or annually. But each state’s actual deadlines are different. One might be due on the 20th of the month following the taxable period, another on the 25th, and another on the 30th. You have to keep up with each state’s sales tax deadlines, including the frequency and due date, and they aren’t always intuitive! You can choose your sales tax state on our website and find the list of sales tax due dates all year long.
Trap #4: Failing to File a Zero Return
Everybody knows that if you file any type of taxes late, or fail to file altogether, you risk a financial penalty. But with sales tax you could receive a penalty for failing to file even when you didn’t collect any sales tax.
Most states require you to file a “zero return” even if you didn’t collect any sales tax over the taxable period. If you don’t, the best-case scenario is a few annoying letters leading up to the cancellation of your permit. The worst-case scenario is a fine. (Florida’s is $50!) Nobody wants to pay a fine when they didn’t even owe any sales tax in the first place!
Trap #5: Spending Too Much Time on Sales Tax
Let’s face it. Sales tax is an administrative hassle, not a moneymaker. The more time you spend complying with sales tax laws, the less time you have to spend on the activities that actually make your business profitable. That was a one-time sourcing opportunity slipping away because you were scratching your head over your California sales tax return. Sales tax automation solutions makes sales tax compliance simple so you can get back to doing what you do best – making a profit!