WHO KNEW? LOCATION, LOCATION, LOCATION, FOR SALES TAX!

You’re tackling a lot when you own a business. And these days, staff retention and the pressures of inflation make it that much harder to stay on top of it all.

It’s easy to forget things (or miss them), and that could easily land you in hot water.

If you’ve got an online business (and that’s more and more commonplace), you’re faced with even more challenges than your typical brick-and-mortar. One of them being sales tax. This can get tricky because you could have buyers from everywhere in the country so you could be liable for paying sales tax to a state. And sales tax rates vary from state to state (nexus is a thing… read on if you don’t know about it).

Of course, one helpful solution for this is to use eCommerce software that automatically tallies that for your customer. Here are some good ones.

And in the meantime, here’s a little insight to get you on the right page with the online sales taxes issue so you know how to start facing it…

Janet Behm's
"IRS Problems" Strategy Note
Forgetting to Pay Sales Tax?
“There is no such thing as a good tax.” - Winston Churchill

If your business sells a product or service online in other states, you probably know two things:

• Business has generally been brisk over the past few years; and
• States usually charge sales tax when consumers buy something.

You’ve also probably got an eCommerce software that calculates what sales tax to charge a customer (usually based on where that customer is). But what happens if you don’t collect that tax – or collect it but never send it to the tax jurisdiction?

Well, if your sales are high enough, you could face audits, penalties, and even criminal proceedings. So here’s what to know about getting out of trouble if you do misstep.

Thank you, South Dakota

Your potential problem with states’ sales tax started four years ago with the U.S. Supreme Court. That’s when the justices decided in South Dakota v. Wayfair, Inc. et al that an out-of-state seller (such as you) could establish “nexus” through economic activity alone and didn’t need to actually be in the state itself.

Nexus is a presence that triggers the obligation to collect and remit sales tax to certain states. It can be economic, based on sales volume, or physical, based on the presence of employees, sales reps, contractors, or even just inventory in a warehouse.

Nexus thresholds vary a lot among states. For most states, the threshold is around a hundred grand or a few thousand sales, usually in a year. In New York, for instance, you ring the bell at just 100 sales; Texas requires half a million bucks. Sometimes even localities (cities, towns, and so on) charge the sales tax in states like Alaska and Colorado.

Confusing, we know. This economic nexus chart shows where you stand in your busiest states. (In some cases, states charge use tax, often if they don’t charge sales tax; your obligation for use tax is similar.)

If you do trip the threshold in a state, you must register with the state and file a state sales tax return just like you file federal income tax returns during the calendar year. (You’re not dealing with the feds on this, by the way.)

You typically have to file monthly, quarterly, or annually – but in the Nothing’s Ever Easy Dept., some tax jurisdictions want a return semi-annually or bi-monthly, and sometimes even if you didn’t make any sales in the state (a “zero return”) once you’ve registered.

Compliance problems

If you have nexus, you charge the sales tax rate to customers, collect the money and send it to the tax jurisdiction when you file your sales/use tax return. Send – it – in. To collect the tax money but not remit it is about the worst problem of non-compliance you can have. You could be fined a big chunk of your outstanding taxes in addition to having to repay the tax itself – not to mention maybe face prison time.

Okay, for whatever reason you’re out of compliance with sales tax in a state. Do not panic. You have a couple of immediate moves.

• Register with the jurisdiction. You register for sales tax purposes with a prior period effective/start date that matches up to when you first had nexus and taxable sales. Yes, you’ll have to file the applicable returns and remit the tax due.
• Reach out to past customers. If you collected sales tax in error, you could refund the tax to your customers. If you haven’t collected sales tax when you should have, often you have the option to go back to your customers and at least request it.

What good would that do? Are they really going to send in the money? Maybe not, but as a move, it can help if the jurisdiction decides to take the whole thing up a notch.

Audits

Penalties get especially nasty if your non-compliance is unearthed only via a sales tax audit. Again, do not panic. If you get the dreaded letter, get your records together — we can help with this – let your employees know, and designate one person from your company to be the auditor’s main contact. When the auditor does show up, always treat them professionally.

Be proactive and pleasant in sharing information that doesn’t hurt your case – this shows you’re willing to help and who knows, it might inspire the auditor to go a little easier on you.

Did you know you can negotiate the audit findings? You can (no guarantee it’ll work) ask if the jurisdiction offers a tax amnesty program. Ask about remediation methods, too, such as a voluntary disclosure agreement. A VDA will allow you to self-report back sales taxes; in exchange, states will often waive a penalty and even limit how far they’ll look back at your non-compliance (generally three to four years).

Various Government entities, “JUST WANT YOUR MONEY.” If they get that , they mostly leave you alone. Just be aware, now that so many transactions are occurring interstate.

BE THE ROAR not the echo®

Making things right for you,

Janet Behm