The law requires many businesses to collect state and local sales tax on taxable goods and services. Currently, 45 states and the District of Columbia impose statewide taxes, while 38 states collect varying local sales tax. Every state administers its own specific guidelines on issuing a sales tax permit, sales tax return filing, and other related processes. As a business owner, it's important to be aware of and integrate proper business sales tax practices.
The ideal goal for tax planning in any business is to effectively minimize tax liabilities. This involves being aware of the current sales and use tax laws and rates while considering that each state has its own tax schedules, rates, and exemptions. Ultimately, a business can manage its finances and achieve future goals. This also applies in sales tax planning that the businesses expect by the state to collect and remit sales and local taxes.
That said, there are five popular mistakes businesses should avoid in managing their sales tax obligations and sales tax planning.
Avoid These Business Sales Tax Practices When Managing Sales Tax Obligations
1. Failing to Meet Sales Tax Obligations
First off, provided your business operates in the 45 states that impose state sales taxes, you need to be conversant with the state and local sales tax guidelines. Otherwise, you risk facing penalties and interest. As a business owner, you have to be aware of the correct filing of tax returns, important deadlines, and taxable and nontaxable products and services.
2. Misinterpreting Nexus Requirements
Generally, imposed sales taxes occur on a physical and economic nexus. This helps determine where you collect taxes. A physical nexus means any business with a physical presence in a state needs to have a sales tax permit. Economic nexus took hold after the ruling in the South Dakota vs. Wayfair Inc. case. Now businesses have to collect and remit state taxes without any physical presence. If you have nexus and have not been reporting, it can result in large amounts of past liability.
3. Applying the Wrong Tax Rates, Jurisdictions, and Boundaries
As a business owner, you have to contend with a wide range of state and local sales tax rates, jurisdictions, and boundaries in all 45 states. This easily turns complex if you are operating in multiple jurisdictions. Here, you have to determine the sales tax rates based on ZIP codes. Fortunately, states provide websites and tax rate tables to help track and apply the right rates. In addition, you can access software providing different rates, such as Ava Tax ST which automates sales tax compliance. However, you cannot be complacent as rates tend to change regularly.
4. Misunderstanding Product or Service Taxability
It is possible to get lost in tracking the taxability status of various products and services. Indeed, states frequently change the taxability rules. In addition, states have different definitions of products to establish the correct tax rates and rules. Take, for instance, Texas outlines taxable services subject to sales and use tax, while California exempts services except if included in the taxable transfer of property. This requires constant attention to avoid making costly mistakes while filing taxes.
5. Incorrect Application or Calculation of Consumer Use Tax
Businesses overlook these common mistakes during audits. The use tax is imposed on tangible personal property not subject to sales tax. Businesses owe the state use tax when consumers purchase a taxable item without paying sales tax. This also applies to online purchases by businesses where they're not charged tax. If use tax is not remitted they end up owing it on audit. As a seller, it's imperative to learn about your role in remitting the use tax. This is especially as some states are keen on administering use tax laws.
As states are actively administering their sales tax mandates, you should expect to get an audit notice. This causes some panic especially if the business owner does not know the information required and the process of audits.
Common Business Sales Tax Practices to Avoid
Should you be the next candidate for a sales tax audit, here are four common practices among businesses to avoid.
1. Mismatching Data Between the Sales Tax Return and Income Return
This is one of the triggers that lead to an audit. Auditors will likely look into your 1099-ks and federal income tax returns to make a comparison with your sales tax return. If any discrepancies are caught, this can be very costly for you.
2. Not Performing a Preliminary Audit on the Business
Unawareness of what's behind the scenes can hurt you when the audit happens. A self-audit will help highlight any errors or irregularities with documentation. Otherwise, there is the risk of being charged with penalties.
3. Not Having Correct Exemption Certificates
An exemption certificate allows a buyer to make purchases without paying sales tax. In case the certificate expires, the seller will fall short in collecting sales taxes and lead to an audit. An error in one certificate is enough to make auditors assume there are similar errors in all certificates, leading to costly penalties, fines, and fees.
4. Providing Unnecessary Documents During Business Sales Tax Practices
Sometimes the auditor requests other documents outside of the required ones. If you allow an auditor to access more information, this can, indeed, lead to overstating your sales tax assessment.
Find More Business Sales Tax Practices to Avoid
Complying with sales taxes and preparing for sales tax audits can seem daunting. However, avoiding the typical mistakes that give businesses a difficult time, will give you leverage. The main focus should be to willingly work with the state in fulfilling your tax obligations. In turn, this promotes your business' productivity in terms of planning your finances and budget around applicable taxes. Work with an experienced sales tax professional with full awareness of any sales tax requirements and implications.
Sales Tax Helper is more than capable of helping you handle all types of sales tax issues, including sales tax audit defense. Knowing that sales tax can get complicated, we offer a personalized solution to help your business meet its goals without obstacles. Reach out to us today for a consultation.