The top five eCommerce U.S. Sales Tax Pitfalls
In the past, there was the case that sales tax was effortless for merchants of eCommerce in the United States. In the early days before the regulators came in to oversee their business, eCommerce retailers could tax sales on transactions within states in which they had no physical presence.
In the year 2018, the situation got more complex when the Supreme Court ruled that the case of South Dakota vs Wayfair, the U.S. Supreme Court declared that each state was able to set its own regulations regarding the tax on sales for online stores. At present, 45 states have state-wide sales tax and every state has its own nuanced rules. Beyond those it is currently over 11,0000 local or local tax authorities. It isn't easy keeping track of everything.
Five sales tax pitfalls to stay clear of
Given the complex nature of sales tax compliance across America the sales tax issue is a complex subject. U.S., avoiding the common missteps below can aid you with the majority of tax compliance. Be prepared for this difficult aspect of eCommerce company ownership.
One of the biggest mistakes is not realizing the necessity of collecting sales tax
While it's only been three years since it was prior to the Wayfair rule, some companies aren't yet up-to-date with their tax-related procedures. If that's you, and you're still not paying or filing taxes the required taxes now is the time to talk with an SALT (State and Local Tax) consultant (SALT) to find out the tax liabilities you incurred from previous taxes and develop strategies for moving forward.
The good news is the tax departments of the state tend to be more accommodating when you speak to them instead of figuring out the mistake themselves.
This scenario is common: companies know that eCommerce stores have to charge sales tax but wrongly think they are exempt because of their type of product they sell. This is a frequent mistake that is made by SaaS firms and digital retailers.
Regulations tend to move in a more gradual manner as technology advances in the past, and throughout time the sales tax was calculated mostly on tangible goods such as televisions, furniture and TVs. In recent times it has seen a rise in products which don't have tangible characteristics or any other characteristics, such as applications downloaded through the cloud. There's no physical CD-ROM to be taxed on for these software and that's why it was previously thought it wasn't subject to sales tax. Since states have seen the rise in sales of these digital goods that are not tangible and are making changes to their tax laws to bolster their revenue.
Presently, 20 states tax SaaS (software as services) items. It's worth looking at a detail of how they tax SaaS. Are your offerings in the category? Many states differentiate between digital products like eBooks as well as software. Therefore, it is important to identify your products with a label that is appropriate.
The second pitfall is forgetting to check the nexus
Nexus is one of the most difficult concepts to grasp when it comes to selling tax compliance. In essence, Nexus refers to the degree that the state is at to have an obligation for businesses to collect and pay the sales tax. It was previously primarily physical (a establishment within an state, for instance.) But, in the time of Wayfair states have set an economic threshold regarding gross sales as well as the amount of transactions.
In order to remain compliant and in compliance, it is essential to be aware of these thresholds and the specifics for every state, so you're aware of the state in which you are and whether or not you require collecting and paying sales tax. If you exceed a nexus threshold without knowing the threshold and do not start taking sales tax from your customers, you will be required to pay the tax on itself. This isn't an ideal situation --- ask these six retailers.
Pitfall #3: Dispersed data and report
States have their own regulations concerning the amount your sales on these marketplace facilitators are counted in determining your nexus threshold. As you can see, it's a challenge to determine the threshold quickly. The Sales tax monitor can provide you with one, complete picture of your sales total across all channels as well as the tax paid and the amount you will need to reimburse yourself. It can help you save a lot of time and help you take an approach that is strategic to complying.
The fourth pitfall is misclassifying products (and the tax rates they inflict)
Did you realize the fact that, In New York, a bagel is tax-free when used as an essential in your supermarket, but the moment you slice that bagel, you'll be taxed 8.75% as a prepared food item? And in New Jersey, real fur clothes are considered to be a luxurious item , and therefore taxed. But the synthetic version isn't. For Pennsylvania, both genuine and synthetic fur are tax-deductible.
Tax codes are filled with this kind of nuance as well as every state offers different terms as well as definitions. It is essential to understand which product is classified for each state. Sales tax software can help simplify the categorization process, but if you have items in your company that could be subject to taxability interpretation, you may need to speak with the tax expert.
Pitfall #5: Missing filing deadlines
The filing deadlines are not just different for each state. However, for many states the filing deadlines can be altered depending on the growth of your business in dimensions. It is generally the higher revenue that your company earns, in addition to the more frequency that states will require that you file tax returns.
There are monthly, quarterly as well as annual deadlines, based on your state's requirements and the size of your business. Most states require taxpayers to file their tax returns on the 20th of the month after each month after tax-free periods have ended. A few states require taxpayers who sell to file their tax returns by the end of the day of the month after the taxable period, however. There are a small handful of states that require companies to file their tax returns before the 15th of each month or 23rd. It's the reason it's essential to be aware of when the tax return deadlines are for the states with which you're in a nexus.
Automate compliance, reduce errors Save time
If this all seems to be a little confusing, don't worry. There's a solution. TaxJar is an application for sales tax that TaxJar works seamlessly with and can aid in the process of simplify a lot of the processes. This includes the challenging part of compliance with sales tax, including real-time computations in addition to aggregated reporting across every channel, and the filing of each state. A good automated system will also track your status as a nexus in every state, and alert you when you're getting close to reaching the threshold. Also, it will monitor those annoying shifting deadlines for filing.
If you're worried you're not complying it's the best time to get your act in order. Set up a time to talk to a SALT consultant to discuss the particular situation you're facing and devise an action plan. If you're supposed to be paying sales tax, but haven't yet, they will assist you in taking the next actions to decrease penalty and fines.
If you're not already making sales tax automated then you should consider making the effort to do this. This frees up some time to spend on more strategically important issues and reduce the potential for errors. Since, at the end of the day we are all human beings.
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