by Robert Schulte, founder and CEO of LumaTax
Making it past the just-getting-started phase of building a business and being able to focus on how to grow and scale is so rewarding. But for most small business owners, getting there means experiencing a few growing pains, especially when it comes to sales tax compliance.
Keep reading to learn five sales tax tips that will help you avoid audits and stay fully compliant with small business tax laws:
1. Keep Your Systems Up-To-Date.
Every state has different rules and regulations when it comes to how small businesses are required to collect tax. The challenge for small business owners is – because of local economic shifts, budget deficits, demographic trends and a variety of other factors – tax rates and laws change from time to time. In order to remain compliant, you need to be aware of and reactive to any changes that apply to your business.
Incorporate routine sales tax calculation check-ups into your business strategy. Check state and local tax rates quarterly and make sure any manual formulas you use are current. Additionally, if you have an e-commerce site or use a point-of-sale system for your mobile or brick-and-mortar locations, make sure you regularly perform software updates to ensure your system is using current rates for in- and out-of-state transactions. Doing so will help you prevent tax errors that can ultimately lead to penalties, or even an audit.
2. Add Important Tax Deadlines To Your Calendar.
Some states require quarterly sales and use tax filing, while others require monthly filing. In many cases, the frequency varies based on sales volume. But, when you’re swamped with daily to-do’s that must get done to keep your business running, it can be really easy to miss a filing deadline.
To avoid an “oh shoot!” moment, set aside fifteen minutes to look up your tax filing deadlines and schedule all due dates into your calendar. If you tend to be forgetful, set a reminder to go off a few days before the filing deadline to make sure you’re not caught off guard. That will give you a little time to gather your paperwork and make sure your numbers are in order. Then, set a second reminder for the actual filing due date. Meeting tax deadlines will not only keep the state happy, but it’ll also help you avoid the potential for late filing fees and penalties.
3. Learn How To Navigate Nexus Laws.
Though you may not understand all of the ins and outs of nexus, it’s important that you at least have a firm grasp on the basics. The layman’s translation of the word nexus is “significant physical presence”. In short, nexus determines whether or not an out-of-state business (your company) that is selling goods or services into another state is responsible for collecting sales or use tax.
Nexus commonly comes into play as businesses begin to grow because it typically applies once a company maintains employees, service people, independent service agents, inventory, offices, warehouses, or traveling representatives. Laws vary from state to state and tend to be quite complicated – especially for online or mobile retailers, who have to consider multiple state laws and regulations.
To understand what rules apply to your business and to make sure you’re fully compliant, spend some time researching your local nexus laws, as well as the laws of any additional states you do business in. If you have questions or concerns, contact the appropriate state regulatory board for clarification.
4. Be Aware Of Affiliate Tax Obligations.
Thanks to the ever-expanding number of online retailers, nexus laws in twelve states have evolved to encompass two different types of compliance: click-through and affiliate. According to Bloomberg BNA, click-through nexus dictates that out-of-state vendors that compensate people for sales made via links on their sites must collect sales and use tax. It sounds like a bunch of mumbo jumbo, but let’s look at an example. Say you own an online store that sells t-shirts and you set up an affiliate program to get more traffic to your site. When someone who clicked on an affiliate link lands on your site and buys a t-shirt, your affiliate marketer gets a cut of the profit – and you’ve just established click-through nexus.
While click-through nexus is generally pretty straightforward, affiliate nexus varies substantially by state. For example, in Georgia, affiliate nexus policy states that any out-of-state retailers who have over $50,000 in gross annual receipts from affiliate referrals have to collect sales tax for the state. To contrast, in California, affiliate nexus dictates that out-of-state retailers related to any entity located in California – including those with similar patents or trademark – must collect sales tax. Confused yet?
To make sure your business is compliant with all applicable state nexus laws, we recommend working with small business tax compliance experts dedicated to taking the burden of understanding what all this means off your plate.
5. Keep Careful Documentation Of Exempt Sales.
A sudden change in sales volume, overly complex tax returns, and specific events – like an increase in exempt sales – can trigger an audit. Although the state must prove a sale was taxable via an audit, the seller ultimately has the burden of proof when it comes to compliance.
So, let’s say you get audited and have to prove that you’re compliant. If you have exempt customers, you may have to demonstrate the legitimacy of their purchases. That’s why it’s good business practice to keep a copy of your buyer’s state-issued exempt certificate on file and to note your customer’s exemption number at the point of sale. It’s also not a bad idea to keep a separate log of all exempt sales, so it’s easy to reference if anything ever comes into question. Doing so means you can easily prove the legitimacy of your exempt sales and avoid tax penalties.
States are more aggressive than ever when it comes to imposing sales tax liabilities for sales transactions. That’s why it’s hugely beneficial to focus on compliance early on, and evolve as your business starts to grow. Follow the five tips outlined above to keep yourself organized and fully compliant to decrease your audit risk and avoid tax penalties.
Robert Schulte is the founder and CEO of LumaTax – a software company that makes sales tax filing a breeze for busy small business owners. Robert was formerly a Senior Tax Auditor for the State of California as well as the co-founder of Taxcient.