Our sales tax experts sat down to answer some of the toughest sales tax questions asked by our clients. Their responses shed some much-needed light on these complicated tax issues, and they’re a must-see for business owners.
What is Sales Tax & Use Tax and Why are They Important?
Sales tax is a state-level tax applied to the sale of goods and some services. The rate of sales tax varies by state (with some states not charging any sales tax at all), but it is typically around 6 percent. Some municipalities impose additional sales tax on top of the state sales tax. Use tax is similar to sales tax, but it is applied to the purchase of goods and some services from vendors where sales tax was not charged on the purchase. In most states, the use tax rate is the same as the sales tax rate.
Sales tax and use tax are important revenue streams for state and local governments. The revenue from these taxes helps to fund vital public services, such as education and infrastructure. In addition, these taxes help to level the playing field between local businesses and out-of-state businesses. Without sales tax and use tax, out-of-state businesses would have a significant advantage over their local competitors.
Both sales tax and use tax are generally imposed on the final consumer of the goods or services. However, in some cases, businesses may be required to collect and remit these taxes on behalf of their customers. Businesses that make interstate sales are often required to collect and remit sales tax. Similarly, businesses that sell digital goods (such as e-books or software) may be required to collect and remit sales tax in states where they do business.
Some third-party websites that sell goods on behalf of others (think: Amazon) are considered “marketplace facilitators”. Marketplace facilitators are responsible for collecting and remitting sales tax on transactions that are consummated through their platform.
What are the Biggest Tax Headaches for Online Sellers?
As an online seller, you’re responsible for collecting and paying taxes on your sales. This can be a complicated and time-consuming process, especially if you sell in multiple states. You may also be required to file quarterly or annual tax returns, which can add to your paperwork burden.
One of the biggest challenges for online sellers is keeping track of their sales tax obligations. Sales tax rates vary from state to state, and they can change frequently. This can make it difficult to know how much tax you owe on each sale.
Further complicating matters is that sales tax rates can change based on the county or city where a product is shipped which means that sellers need to track local rules as well as state rules.
Another issue that online sellers face is determining which items are taxable. In many cases, the answer depends on the specific item and the state in which it’s being sold. For example, some states exempt clothing from sales tax, while others do not. If you’re unsure whether an item is taxable, it’s important to research the rules in your state before making a sale. Luckily, most sellers stick to a single type of good which allows them to become experts on their products’ taxability.
The good news is that there are software programs available that can help you manage your sales tax obligations. These programs can also keep track of your sales for economic nexus (discussed below) purposes, as well as ensure you are charging the appropriate sales tax rate based on the ship-to location of the item sold.
What is Economic Nexus and the “Wayfair Decision”?
In recent years, states have increasingly been looking for ways to increase revenue and the rise in online shopping over the past 30 years was eroding an important source of revenue for the state.
One way they have increased their revenue is by expanding their sales tax reach to include out-of-state sellers. In 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair, that states can require out-of-state sellers to collect and remit sales tax even if they don’t have a physical presence in the state. This ruling overturned a 1992 decision that had previously limited states’ ability to tax out-of-state sellers absent a physical presence. The court’s decision in Wayfair has led to a number of changes in how states tax remote sales.
Under the Wayfair decision, states can now require out-of-state sellers to collect and remit sales tax if the seller meets a certain threshold of economic activity in the state. This threshold is often referred to as “economic nexus.” The exact economic nexus ‘thresholds’ vary from state to state, but typically it is based on either the total amount of sales made into the state or the number of transactions made with customers in the state.
Once a seller meets the economic nexus threshold, they are required to register and begin collecting and remitting sales tax on all taxable transactions made within the state. Most states with sales tax set their economic nexus level at revenue of $100,000 within the state or 200 transactions, although some states don’t assert economic nexus until revenue reaches $500,000.
What Kind of Trouble Can I get into for not Filing Sales Tax?
If you don’t file your sales tax, you could be in for some trouble. Depending on the state, the penalties for not filing can range from a slap on the wrist to big fines and even jail time. In general, though, you’re more likely to face economic penalties than anything else.
Most states will charge interest, penalties, and late fees on any unpaid sales tax, and they may also put a lien on your property if the balance remains outstanding for an extended period of time. This means that the state can seize your assets – including your bank account – to pay off the debt.
Albeit rare, you may also be subject to criminal charges. If you’re convicted of failing to file returns and pay sales tax, you could face a sentence of up to a year in jail and/or a fine of up to $5,000 (depending on the state) If the state determines that you were fraudulently underreporting sales tax, most states consider this crime a felony. So it’s important to make sure that you stay current on your sales tax filings.
You are required to remit sales tax on taxable sales even if you do not charge tax on the sale. Your failure to collect the tax from customers does not negate your responsibility to pay the tax – you’ll have to pay the tax from your company’s funds.
How Much Should I charge for Sales Tax?
Sales tax is a minor but important part of running a business. The amount you charge depends on several factors, including the type of product or service you sell and the state in which your business is located.It can also depend on where the product is being consumed by the customer. In most states, the general sales tax rate is around 5-6%. Some states have higher rates, and some have lower rates. California has the highest state sales tax rate in the county at 7.75% while five states do not have any statewide sales tax. Some states also exempt certain items from sales tax, such as food, clothing, or prescription drugs.
When setting your price, be sure to check the sales tax rate for your state and whether any exemptions apply to your products or services. With a little bit of research, you can ensure that you’re charging the right amount of sales tax.
Every state has a rule in place that if you collect excess sales tax, you will be required to remit the sales tax to the taxing authority – you don’t normally get to keep the extra amount charged.
What Are Some of the Biggest Sales Tax Mistakes I can Make?
Sales tax mistakes can be costly and time-consuming to fix. Here are some of the biggest mistakes businesses make when it comes to sales tax.
Not collecting the appropriate tax on sales. If you did not collect enough sales tax from your customers, you will need to make up the difference when you file your return.
Failing to file returns. Every business with nexus in a state is required to file a sales tax return, even if they don’t have any sales to report. If you fail to file, you may be subject to penalties and interest.
Not keeping accurate records. Good record keeping is essential for ensuring you are complying with sales tax laws. Be sure to keep track of all your sales, purchases, and exemptions. This will make it easier to file accurate returns and minimize your audit risk.
Failing to remit payments. Once you’ve calculated how much sales tax you owe, it’s important to make the payment promptly. If you don’t, you’ll be charged interest, penalties, and late fees. In some states, failure to remit sales tax collected can even result in criminal penalties.
Forgetting about nexus. Most businesses only have to collect sales tax in states where they have what’s called “nexus.” This generally means having some type of physical presence in the state, such as a office, warehouse, or retail store. However, there are some exceptions – for example, many states now have rules that include warehouses and other delivery equipment within a state to have created a nexus. Also, don’t forget about economic nexus.
What Are The Steps to Become Compliant With Sales Tax?
Depending on your business model and location, you may be required to collect and remit sales tax. To become compliant, you will need to register for a sales tax permit, collect taxes from customers, and file and pay taxes to the appropriate jurisdiction.
To register for a sales tax permit, you will need to contact your state’s tax department. You will be asked to provide information about your business, such as your business name, address, and type of products or services sold. Once you have registered for a permit, you will need to start collecting taxes from customers. Depending on the state, the tax rate may be different for different types of products or services. For example, in some states food is taxable while in others it is not. You will need to make sure that you are charging the correct amount of tax to your customers.
Once you have collected taxes from customers, you will need to file and remit them to the appropriate state agency(generally the department of revenue). Most states require businesses to file sales tax returns on a monthly or quarterly basis. You will need to include information such as the total amount of sales for the period, the amount of tax collected, and any applicable exemptions. After filing your return, you will need to make the sales tax payment.
States set their own timelines for remitting taxes and filing returns, and they can vary significantly. You may need to file monthly, quarterly, or annually depending on your state’s rules for your business size.
Remember, if you have nexuses in multiple states, you’ll need to keep up with numerous filing deadlines and requirements.
Keep in mind that sales tax returns are subject to audits just like income tax returns. Having extensive records of sales including the products, sales tax collected, and customer location is key to coming out of an audit unscathed.
What is the most confusing part about Sales Tax Compliance?
Sales Tax Compliance refers to the process of ensuring that businesses collect and remit the correct amount of sales tax to the appropriate taxing authority.
Compliance can be a complex and confusing process, especially for businesses that operate in multiple states. There are a few key things to keep in mind when it comes to Sales Tax Compliance.
Businesses need to determine whether or not they have a nexus in a given state. A nexus is essentially a taxable connection with a state which could be physical or economic.
If a business has a nexus in a state, they are required to collect and remit sales tax on all taxable sales made to customers in that state.
Businesses need to determine what tax rate to charge their customers. This can be complicated because there are often multiple tax rates in each state, and the rate can vary depending on the type of product or service being sold.
Each business must also determine if any local sales tax applies to their sales and constantly monitor changes in sales tax rate which can happen frequently throughout the year.
Can There be Criminal Charges for not Filing Sales Tax?
Depending on the state, business owners may be required to file and remit sales tax monthly, quarterly, or annually. Failing to do so can result in hefty penalties, including interest and fines. In some cases, business owners may even be subject to criminal charges.
Most states consider failure to file sales tax a misdemeanor offense, punishable by up to a year in jail and a fine of up to $1,000.
However, some states treat it as a felony offense, which can result in up to five years in prison and a fine of up to $5,000.
In addition, business owners who knowingly fail to file sales tax can be charged with tax evasion, which is a federal offense that can result in up to five years in prison and a fine of up to $250,000.
In our experience, criminal charges tend to be a last resort, and most states will slap you with penalties, fines, and other sanctions before they go to criminal complaints.
As you can see, failure to file sales tax can have serious consequences. Therefore, it’s important for business owners to be aware of their filing requirements and make sure they are remitting taxes on time.
How to Get Rid of Sales Tax Penalties
Sales tax penalties can be a real pain, especially if you’re already struggling to make ends meet. The penalties are usually a percentage of the underpaid amount and interest on the balances due. There are some things you can do to try and reduce or even eliminate those penalties. Here are a few tips.
First things first, you need to calculate your liability and determine whether a VDA process is necessary.
Next, if you haven’t already, register with your state’s taxing authority. This will help ensure that you’re on their radar and that they know you’re trying to stay compliant. Most states send out regular updates with rate changes to help you stay compliant.
The easiest way to avoid penalties is to file your sales tax returns on time. This seems like a no-brainer, but it’s important to remember that even one late return can add up to significant penalties over time.
If you do happen to miss a deadline or make an error on your return, don’t panic! Many states have amnesty programs that can help alleviate some of the penalties you may incur.
Even if your state doesn’t have an amnesty program, you should work with your taxing authority directly to come up with a satisfactory arrangement. . .
Finally, keep good records. This will not only help you stay organized and avoid mistakes, but it will also give you something to fall back on if you are ever audited.
Following these tips can’t guarantee that you’ll never get hit with penalties or interest, but the can help minimize the chances.
Talk to a Sales Tax Expert Now
Tax Hack’s team of state and local tax experts is standing by to assist you with your toughest sales tax challenges. Get started with a one-on-one strategy session with one of our tax pros now, and see how Tax Hack can make sales tax compliance simple and stress-free for you and your business.