Being a small business owner sounds like a good thing. It beats working for the man all day. But you've got to be careful. Did you know that following the states’ sales tax laws is just as important as making money for small businesses? You could be in for an unpleasant surprise if you aren't staying up to date on your sales tax compliance. This article will lay out the top 7 most common sales tax compliance issues these small businesses need to be aware of.
1. Collecting the Right Amount of Tax
It is one of the most common sales tax compliance issues for small retailers. It's also the easiest to fix.
If you only collect sales tax on taxable items, you must ensure that your staff on the front lines are adequately trained. If you do not have a robust accounting or POS system, it'll help them manage it on all taxable items and not just those marked with an asterisk or other designation. It is essential for food since most states tax taxable food higher than nontaxable food.
As a small retailer, it may be challenging to keep track of each state's different rates. Further, it's even worse if you frequently have customers from other states or sell online and ship out-of-state orders. Luckily, most states provide free sales tax software to calculate how much tax you should collect based on the type of transaction and shipping address.
2. Filing Your Sales Tax Returns on Time
If you're a small business owner, you have to file and pay your sales tax on time. You could be subject to penalties and interest or shut down if you don't.
The sales tax return deadline is usually once a month or once a quarter, depending on the state in which you operate. Each state has its own rules, but generally, businesses must submit their sales tax returns.
Failing to file these returns can lead to hefty fines and other penalties. The most common sales tax compliance issues that cause late filings include:
- Missed due dates
- Missing information on returns
- Lastly, incorrect calculations
3. Reporting All Your Sales
It seems like an easy enough task. Just report every sale and keep track of what percentage of your total revenue is taken by each state's taxes. It's tricky when you have out-of-state customers who pay for their purchases by check or money order or when they purchase using PayPal (which has its own set of rules).
There's also the issue of shipping charges and handling fees, which must appear in the final price but aren't always apparent from looking at a receipt alone
4. Keeping Good Records to Avoid Sales Tax Compliance Issues
You have the same record-keeping responsibilities as any other business owner as a retailer. It means keeping records of your retail business's income and expenses, including income from customers and payments for merchandise inventory. From a sales tax perspective, keeping, organizing and maintaining proper exempt sales documentation such as those pesky resale and exemption certificates.
You must also show that all sales are taxable and that you used up all purchases in the business or donated for charitable purposes (if applicable).
5. Staying Up-to-Date With Changing Sales Tax Laws
As a small business owner, you should always be aware of new laws that affect your business. Sales tax laws vary constantly, and you want to stay on top of them. Further, you can learn about new legislation by signing up for newsletters from your state's revenue office or joining associations related to your industry.
6. Incorrectly Classifying Products
The way you organize products may determine whether or not you have to collect sales tax on those items, so you must get it right from the start. If you sell something as "food" but has a secondary purpose (such as a blender used as a mixer), it might be subject to sales tax in certain states.
7. Remitting Sales Tax Correctly
There are many different ways to remit sales taxes, including paying directly to the state and using a service like Avalara. Many retailers incorrectly choose the wrong method, leading to penalties and interest payments on their taxes.
Avoid Common Sales Tax Compliance Issues
Upkeep of sales tax legislation is essential for small retailers. It is worthwhile to record when your state imposes sales tax compliance obligations on you. It could be filing sales tax reports or how you process customer purchases and sales.
Seek expert advice if you still have questions on topics not covered here. Contact the Board of Sales Tax Helper for further clarification.