Out with the old, in with the new. The new year is a great time to evaluate what has worked in the past, and take a hard look at what isn’t working. With January being the start of tax season, this is especially true for evaluating whether your sales tax compliance has kept up with your business’s growth over the past year.
Why should you give yourself a sales tax checkup?
As your business grows and changes, so does your sales tax liability. For example, some common products like food and grocery items are non-taxable in some states, but if you’ve expanded into a new state, you should make sure you’re collecting (or not collecting) sales tax on the right products.
Let’s get started.
Double Check Your Sales Tax Nexus
Sales tax nexus is just a fancy way of saying “significant connection” to a state. You only have to collect sales tax from customers in states where you have sales tax nexus.
As your business grows and changes, you may find that you have nexus in more states. Here are some factors that commonly cause nexus in a state:
- A location
- Inventory for sale
- An affiliate
- A drop shipping relationship
- Temporary sales (such as at a tradeshow or craft fair)
If you’ve opened a location in a new state, started selling at a craft fair, or hired an employee in another state, you may be required to start collecting sales tax in other states.
Update your Sales Tax Permits
If you do have sales tax nexus in a new state, you are required to register for a sales tax permit in that state before you begin collecting sales tax from buyers there.
If you have moved or your business entity has changed (ex: from a sole-proprietor to an S-Corp) you may also be required to update your sales tax permit. Sometimes this is free, but sometimes it costs a small fee.
In some cases, maybe you no longer have nexus in a state. If that is the case, you can cancel your sales tax permit in that state. Just contact your state’s department of revenue to make changes to your sales tax permit.
Ensure You’re Collecting Sales Tax from the Right Customers
If you have nexus in a new state, or no longer have nexus in a state, be sure that your actual online shopping carts and marketplaces reflect that. Double check that you are collecting sales tax from the right customers. If you have nexus in a new state, be sure to update all of your shopping carts and marketplaces to automatically collect sales tax from those customers. (And vice versa if you no longer have nexus.)
Ensure You’re Collecting the Right Amount of Sales Tax
Sales tax rates can change. If you have automatic sales tax collection, then rates should update automatically. But if you have set any custom rates, be sure to watch out for bulletins from your state letting you know that rates have changed.
Also, keep “product taxability” in mind. Most tangible products are taxable. But in some states, necessities like clothing, groceries or textbooks may not be taxable. If you are collecting sales tax in a new state, make sure you know what in your product catalog is taxable in that state, and what might not be taxable. Check with each state’s taxing authority for more information.
Automate Your Sales Tax Compliance
If you’re spending too much time reporting and filing sales tax, consider automating your sales tax compliance.
A sales tax automation solution will connect with all of your sales channels, keep track of all the sales tax you’ve collected, and give you return ready reports so you can file easily. Or if you’d rather never touch a sales tax return again, you can even AutoFile your sales tax returns in most states.
If it takes you more than about 30 minutes to fill out a sales tax filing, sales tax automation will save you time. And time is money!
And that’s it! You’ve given your business a 2017 sales tax checkup. For more about sales tax, check out our Sales Tax 101 for Online Sellers guide.
Mark Faggiano is the Founder and CEO of TaxJar, a service that makes sales tax reporting and filing simple for more than 7,000 online sellers. Try a 30-day-free trial of TaxJar today and eliminate sales tax compliance headaches from your life!
Shippo is a multi-carrier API and web app that helps retailers, marketplaces and platforms connect to a global network of carriers. Businesses use Shippo to get real-time rates, print labels, automate international paperwork, track packages and facilitate returns. Shippo provides the tools to help businesses succeed through shipping.