6 Common Mistakes Businesses Make With Sales Tax

If you run a business, sales tax is likely something you won’t be able to avoid. And regardless of whether you’re running a small business or a Fortune 500 company, understanding how sales tax works can ensure you stay compliant and help you avoid costly tax mistakes.

This article will explore six common sales tax mistakes and provide tips on avoiding them.

1. Not Tracking Sales Tax Nexus

Businesses selling in the US are required to collect sales tax in states where they have nexus. Sales tax nexus occurs when a retailer or online seller has a connection to a state, such as an office, warehouse, or other business activity. It can also be established by making a specific number or amount of sales in a state, referred to as economic nexus.

In many states, economic nexus thresholds are $100,000 in gross sales or 200 separate sales transactions in a year. Some states may require a combination of both to register and file state sales tax returns.

Not tracking nexus can be a costly mistake for businesses as this can lead to penalties if you are not filing in the states you need to be.

Using sales tax software is the best way to track nexus correctly. The best software incorporates nexus tracking and lets you know when you’re close to or have reached nexus in a new state. This lets you know when to register in a new state to stay compliant.

2. Failing to Register to Collect Sales Tax

Companies must register for a sales tax permit in every state or locality where they have reached physical and/or economic nexus. If a business reaches nexus and fails to register, it can face severe financial penalties and back taxes ranging from hundreds to thousands of dollars. Some states will also charge business owners criminal charges for failing to register, collect, and remit sales tax.

The best way to avoid penalties is to:

1. Track sales tax nexus. This helps to stay compliant and know when to register to track sales tax nexus. Remember, you can reach nexus if you have a physical presence in a state or reach a transaction or sales threshold.
2. Stay on top of tax law changes. Tax laws change all the time. You must know what rules the states are changing and when, although this usually occurs at the beginning of a fiscal year or on a quarterly basis. The best way to do this is by signing up for alerts in the states that you operate in.
3. Register immediately. Register to collect sales tax immediately once you have established nexus in a new state. This will help you avoid penalties for late filing and non-compliance.

3. Assuming a Product Isn’t Subject to Sales Tax

Most products and services in the U.S. are subject to sales tax. However, it’s up to the state to decide what is taxable or not. Groceries, clothing, digital goods, software, and services may be taxable in one state but not another. So, if your product or service is tax-exempt in one state, it may not be in another.

If you are an online seller, it’s essential to know tax regulations and laws in each state because it’s likely that whatever you sell is taxable in one state or another where you sell.

Automated sales tax solutions can help determine product taxability in each state and whether your goods or services are exempt.

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4. Charging Incorrect Sales Tax Rates

Charging the wrong sales tax rates to your customers can create a headache for your business. It won’t just affect your bottom line if you’re undercharging or overcharging customers, but can also lead to fines during a sales tax audit.

Not only that, but it could cause a breach of customer trust. If you’re consistently charging the wrong sales tax rates, your customers will notice, and you may lose their trust and business.

The best way to avoid incorrect sales tax rates is:

• Use automatic sales tax calculations. Most sales tax software automatically calculates rates based on the location of the sales and the type of product or service. This helps prevent errors, primarily when you operate across multiple states.
• Audit your rates. Check your transactions regularly to see if there are any calculation errors. This will allow you to make necessary adjustments to your point of sale system and ensure your business complies with tax laws and regulations.

5. Assuming a Sales Tax Platform Is Collecting Sales Tax

Most businesses use online sales platforms like BigCommerce, Shopify, or Stripe to manage their sales. While these platforms can make conducting business easier, it’s vital to understand whether it’s taking care of sales tax collection and remittance for you.

You’ll want to specifically look at whether the platform is a marketplace facilitator or just a sales platform. Marketplace facilitators, like Amazon and Etsy, must collect and remit sales tax on your behalf. But if a platform is not a marketplace facilitator, they are not responsible for handling sales tax for you. A great example is Shopify, which is not a marketplace facilitator. However, the platform does allow sellers to configure their shop to collect sales tax, but that is where it ends.

To avoid any mishaps with your sales tax platform:

1. Look into the specifics of your platform. Be sure to look into the specifics of the platforms where you do business. This is especially true if you do business across multiple platforms, as each can differ.
2. Consider sales tax software. The best sales tax software integrates directly with the platform that you use. It can calculate, collect, and remit sales tax on your behalf to the states, so you can put your time and focus back into your business instead of sales tax.

6. Filing Sales Tax Returns Late

If you file sales tax returns late, you open up your business to fines, interest, and other penalties. Every state has different filing deadlines and its own schedule. You should receive this when you initially register for a sales tax permit, and it’s based on things like your sales revenue.

Here’s how you can avoid filing sales tax return late:

1. Set up filing reminders. You can use sales tax software or alerts to remind you of when to file. You must have a system, especially when operating across multiple states.
2. File your returns early. The best thing you can do as a business is file your sales tax returns early. This will let you avoid any last-minute errors or technical issues.
3. Outsource your sales tax needs. Managing sales tax and filing on time can be tricky. Using an automated solution ensures compliance.

Conclusion

Paying attention to common sales tax mistakes can help you avoid costly errors and stay compliant. It’s important you track nexus, look into product taxability for your goods and services, and stay up to date on sales tax changes.

Need Help With Sales Tax Compliance?

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We help businesses outsource their sales tax from start to finish. Our platform manages the complete sales tax lifecycle by offering:

• Hands-off onboarding: We set up everything for you and ensure it’s done right.
• Full sales tax compliance service: We offer nexus tracking, registrations, roof-top accurate calculations, product taxability research, mapping, reporting, and filing. All this is included in our pricing model — one fee for everything.
• Proactive account support: We are always looking for any changes in sales tax requirements, and our team is happy to answer any questions you may have.

See how you can save time and stay sales tax compliant with Zamp. Book a call below!

About the author

Emily Kordys

Emily Kordys is a Content Marketing Manager with seven years of experience in the sales tax, auto, and real estate industries. She currently resides in North Carolina with her boyfriend and dogs, Shadow and Copr.