Think your business is too small to worry about sales taxes? Think again. Ever since Wayfair v. South Dakota, small business sales tax has been an issue you cannot afford to ignore. With audits ramping up and penalties exceeding $100,000, understanding sales and use tax is essential.
The cost of sales tax non-compliance.
Violating small business sales tax regulations may result in significant penalties. Here’s how it works:
- Your business becomes liable to collect tax when it triggers nexus. The definitions of nexus are different for every state and municipality.
- Upon triggering nexus, you immediately become liable to collect and remit sales tax. (In some states, liability occurs for sales in arrears during that calendar year, regardless of whether they occurred before you triggered nexus.)
- Late tax payments are assessed a penalty and late interest. This amount varies by state, but penalties are generally 10% and late interest is 1-2% per month.
Small businesses often go years without registering or collecting sales tax, resulting in hundreds of thousands of dollars in delinquent taxes, penalties, and interest. Best case scenario, this liability goes unnoticed past the statute of limitations. Worst-case scenario, the state or municipality issues a tax audit and assessment, creating severe financial distress in the business.
How to do sales tax for small business.
You need an expert who knows how to pay sales tax for small businesses. The sales tax compliance process follows four steps:
- Perform a nexus study to determine where you are liable to collect and remit sales taxes.
- Register with appropriate states and municipalities for a sales tax license.
- File returns and remit sales taxes routinely.
- Monitor monthly for new nexus events.
While your in-house accounting team could perform steps 3 and 4, small businesses’ sales tax compliance is often outsourced entirely to agencies like CFOshare for efficiency and effectiveness.
Perform a nexus study
A nexus study determines which states and municipalities require your business to collect, report, and remit sales taxes. Every state has different laws about what constitutes nexus, so a nexus study is best performed by a professional familiar with the most up-to-date regulations.
Software tools like Avatax help calculate economic sales tax nexus but are not sensitive to physical nexus. You should never rely solely on software results for a nexus study.
Register and collect as appropriate
With the nexus study as your guide, your CFO or sales tax advisor can register one or many sales tax licenses. Registration may include reporting past sales and paying penalties for late reporting. A sales tax advisor can help you manage and minimize these penalties.
Take the time to set up your ERP or e-commerce system to ensure accurate and easy sales tax collection and reporting. It is illegal to collect sales taxes in states or municipalities where you do not have a sales tax license.
File sales tax returns routinely
Once caught up on past sales taxes, you should maintain compliance by routinely filing sales tax returns. Sales tax filings are performed monthly, quarterly, or annually depending on each state or municipality’s rules. Timely and accurate filing is critical to avoiding unnecessary tax audits.
Monitor for new nexus events
As your business grows, your nexus will grow as well. Your business tax planning should contemplate nexus events to avoid surprises. Typical events that may trigger new small business sales tax nexus include:
- Opening a new location
- Hiring a W2 employee in a new state or municipality
- Filing an income tax return with a new state
- Serving a new state or municipality as its vendor
- Growing your sales in dollars or the number of transactions in a state or municipality
Do not rely solely on sales tax monitoring software like Avalara, which does not monitor for physical nexus triggers like hiring a new employee. Business operations should regularly communicate with your sales tax advisor about business changes to avoid accidental non-compliance.
Sales tax compliance services
Small businesses’ accounting teams typically outsource sales tax compliance services to specialized agencies like CFOshare, which have developed efficient and reliable processes. Are you ready to fix your sales tax problem? Contact us for a free consultation.