The 8 Most Complicated Small Business Sales Tax Challenges
Successfully Navigating Sales Tax
Sales tax is not the topic of your ordinary table talk. In reality, a majority of small business owners only contemplate sales tax as they are configuring the back office workings that support their retail stores or services. Or, worst case scenario, when there is a breakdown in their sales tax process.
When a business owner comes to the very unwelcome realization that he has a sales tax issue, it is extremely stressful because he may feel ashamed and completely alone in his troubles. Such thinking is false, however.
In reality, hundreds of thousands of small businesses are faced with complicated, yet similar sales tax issues all the time. In all likelihood, if your small business is facing a sales tax issue or problem, another small business has already faced an identical issue and has come up with a solution.
At Thomas Huckabee, CPA of San Diego, California, we have identified eight of the most prevalent sales tax challenges that small business owners come across, and what a business owner should do if they happen.
Issue #1: Staying on Top of Sales Tax Laws & Regulations
In tandem with states seeking out new sources of revenue, state laws change. And states change regulations and rules regarding which products and services are taxable or tax-exempt, who should these pays taxes, when and where sales and use taxes are filed and, of course: tax rates. Hundreds of these tax regulation updates and introductions happen annually, making it difficult to maintain complete compliance.
Some Tips & Survival Tactics
- Stay Informed
Although an arduous process, being aware and keeping up with every change regarding sales tax is invaluable to your business. Don’t worry though, help is there! There are countless free online software products that can keep you abreast of any new trends. Recent tax changes, particularly those reform changes related to federal internet sales tax reforms in the pipeline, your small business will feel comforted by real-time, insightful, forward-thinking articles, expert commentary and more.
- Familiarize Yourself with the Department of Revenue (DoR) Resources
Every state in the union has a Department of Revenue with a unique website. California’s website can be found here, as an example. Within this website, a small business owner can find new laws and updates to current laws, along with any relevant forms and corresponding deadlines. Take the time to explore DoR websites so that you are equipped to find information quickly.
Issue #2: Knowing Which State’s Sales Tax you Should be Charging
As, a small business owner, you must determine your “nexus state.” “Nexus state” is simply a fancy word for a state that has significance to your small business. Some common factors in determining nexus states are:
- Inventory: Where do you store your excess goods?
- Physical Locations: Where are your stores, offices, factories and warehouse?
- Staff Location: Where do your employees and management work?
- Distribution: How are your goods shipped and where are they are shipped from?
As a small business, you might be a compact brick and mortar shop, in which case your nexus state is fairly easy to determine
On the flip side, your small business could have numerous nexus states if your business operations span several states; an online retailer is a good example.
Once your small business has rigorously confirmed your nexus state(s), the next step is to contact your state’s sales tax assessing agency- normally called the Department of Revenue or Department of Taxation. This department will be able to explain the relevant rules about charging sales tax based on the most current laws, your business structure and opportunities for possible exemptions.
Some Tips & Survival Tactics
- Automate your Tax Systems
As your small business expands, the number of states your product or service reaches increases. What does this mean? This means more tax changes to be aware of. Rapidly occurring alterations can take time away from you, the business owner if you are attempting to follow all these changes. This means you have less time for you to focus on revenue generation while exposing your business to more risk. Consider using tax automation software, at this point.
Issue #3: Registering to Collect Tax
Prior to filing and remitting taxes, your small business must file registration forms. Each state has a different form so you will be completing more than just one uniform form for the jurisdictions you need to register with. Please note that, while some states ask for just one registration form to collect tax in the whole state, most local jurisdictions in home rule states have their own individual-restrictions registration requirements.
Some Tips & Survival Tactics
- Memorize your NAICS Code
Knowing the NAICS code that describes your industry is essential in order to remit sales tax. Almost every state form will require a NAICS number. The good news? The NAICS website has an easy lookup tool for these numbers.
- Memorize your Sales Tax ID Number
A state will require filing for a sales tax ID number should your small business be making any taxable sales in that respective state. Of note is that some states will allow you to bypass the sales tax ID number if none of the goods or services rendered by your business are taxable.
Issue #4: Collecting Sales Tax Correctly
Begin by carefully reviewing your license instructions to get a grasp on what on which items you should be collecting sales tax on and the corresponding percentage of each individual sale which you should be collecting. This info should also be available on your state’s DoR website.
After you feel you have a good handle on the laws, take a look at your point of sale (POS) software. All major POS systems have your relevant sales tax information built into their software; you just have to verify that your system’s settings are correct.
Issue # 5: Managing Exemption Certificates
Researching and discovering the proper and legal state tax rates is the simplest part of getting sales tax correct. Then the dicey parts begin: learning which states allow different rates in alternate jurisdictions, and subsequently determining which sales tax rates from which jurisdictions are supposed to apply to each of your small business’ transactions.
Some Tips & Survival Tactics
- Know your Home State’s Regulations
As mentioned, all states are different when it comes to sales tax. Some states have a singular statewide authority for taxing as the mecca for all tax laws and regulations, as the only determiner of nexus in the state.
On the other hand, some states allow local jurisdictions to have a degree of control over sales tax. Depending on the state and the rigor of its “home rule” law for local tax districts, different issues can come to the table.
- Know your Home State’s Sourcing Laws
Sourcing is defined as the physical location where a sales transaction is taxed. Some states or jurisdictions look at tax sales based on origin, otherwise known as where the seller is located. Then, there are other states which base sales tax on the destination – the location where the buyer takes physical possession of the item or service sold. As a small business owner and seller, it is critical to know whether you are located in an origin-sourced state or a destination-sourced state. Being a remote seller is even more complicated- this means your company is located in one state and selling goods or services into another state where you have nexus.
Issue #6: Realizing You Didn’t Collect Sales Tax but You Should Have
When faced with the realization that your small business made errors and did not collect sales tax, things may seem daunting. If or when this happens, your business has three realistic options:
- Register with your state’s tax assessor, tell this representative what date you think you should have started collecting sales tax, and then pay your back taxes along with any penalties, fees, or fines.
- Register from the current date forward, calculate your back sales tax with a CPA and then pay your back taxes along with your current taxes at your first filing date. You can use the information to negotiate a reduced tax bill with the help of a CPA.
- Register from the current date forward, ignore the back taxes and pray the state doesn’t do any research or perform any audits concerning your records.
The first two outlined options are quite similar but the difference in your tax bill may be significant. Clearly, the third option is very risky and if the state proves that you knowingly didn’t collect or remit sales tax, you might very well be saying goodbye to your business. Whatever choice you make, just be sure that it is done quickly because each day adds up.
Issue #7: Owing Substantial Overdue Sales Tax
If your small business is severely behind in its payment of sales taxes, your business is required to have a Voluntary Disclosure Agreement (VDA). VDAs are binding legal agreements, that your company makes with a state, in which the negotiation of a modified look-back period for overdue taxes and lessened penalties is the goal. In this process, the idea is to reduce your liabilities and expenses. As part of the deal, the state gets voluntary back taxes without having to spend money and use its resources should the state would have to pay toward tracking down your business’ debt and the state’s means to recoup it.
The most attractive factor of VDAs is that they are proactive. In many cases, your business is not given the option to negotiate one if the state has already attempted to contact you out to you about tax obligations. Basically, if you owe past due sales tax, the quicker you get working on a VDA, the better position you put your business in.
A local sales and local tax (SALT) CPA should be hired by your business to go through and guide you through these processes.
Issue #8: Finding Professional Help for Your Sales Tax Problems
Most Certified Public Accountants (CPAs) are not well- equipped to handle the intricacies of sales tax. Sales tax is indeed a specialty in the accounting field. What your small business needs is a sales and local tax (SALT) expert.
Thomas Huckabee, CPA of San Diego, California is no stranger to the ins and outs of sales tax. Operating a full-service accounting firm, Tom guides clients through the difficult process of setting up a small business and making sure that all the intricacies included in doing so are done in full compliance with all laws and regulations.