You’re trying to run a business and sales tax is not at the forefront of your plans. Nevertheless, you can do a quick check for the most common errors. Make sure you aren’t making these common mistakes to ensure you have sales tax in order and aren’t at risk for penalties and fees in the case of an audit.
- Misreading your nexus footprint. Besides the economic thresholds in each state, you should also be aware of creating a physical presence in various states. Sometimes a physical presence is obvious in terms of where you have offices or employees. However, you should also be aware that contractors and other third-party resources performing services on your behalf can also create a physical presence. Inventory stored in warehouses is another consideration including consigned inventory stored in Amazon warehouses.
- Incorrect taxability assumptions. Tangible personal property (TPP) is generally taxable unless specifically identified as exempt. Services tend to not be taxable, but this is changing state-by-state almost daily. SaaS for example is subject to sales tax in many states and many services are taxable in states like Hawaii, South Dakota, and New Mexico.
If your business sells software or software-as-a-service (SaaS), you deal with one of the most complex sales tax situations today. Over the last few years many states, their eyes on potentially huge sources of tax revenue, started taxing technology, digital goods, software and SaaS.
- Situsing complexities. “Situs” means position or site. For tax purposes, it is the jurisdiction (state, county and city) that has the legal authority to tax a transaction. For sales tax purposes, it is generally the jurisdiction in which a sale of TPP or taxable services occurs. For use tax purposes, it is the jurisdiction in which tangible personal property or taxable services are used. Situs is easy to determine when the entire transaction occurs at the point-of-sale, but it is more difficult when the transaction involves numerous sites – an issue for many SaaS businesses who may have a central billing/invoicing location for their customer but users accessing the system from all over the country or world.
- Drop shipments. These incur special rules in a lot of states. Many purchases made online today are drop-shipped to consumers and typically involve multiple states and parties. Understanding how nexus applies to your business as well as your supplier’s business is critical. A thorough knowledge of which exemption certificates are necessary based on the ship-to location of your customer can also help prevent you from an unnecessary tax burden. California for example will require you to provide a California resale exemption certificate to your supplier – your home state resale exemption certificate is not sufficient.
- Lack of exemption documentation. A sound tax policy is to charge sales tax when due unless you receive an exemption certificate from your customer. Taking your customers’ word that they are exempt will not help you during an audit. Of course, there are times when you may make an exception for an important customer, but it’s good practice to receive and review these exemption certificates before you decide to not charge sales tax.
In general, sales tax exemptions are statutory exceptions eliminating the need for the retailer to collect sales tax on a particular transaction or on all transactions with a customer. The most common exemption is a “sale for resale,” which allows businesses to purchase products free of tax. Other exemptions can apply to special entities, including government organizations and nonprofits.
If you think you may be making any of these mistakes, it’s time to take a look at your sales tax processes and rectify them before you get caught. There’s no statute of limitations for unfiled returns, meaning that unpaid tax liabilities for non-filing years can be audited indefinitely. And penalties associated can start at 25% of tax liabilities. And even non-filing of zero taxable sales can result in penalties.
Get your sales tax in order by talking to an expert – TaxConnex provides sales tax consulting and compliance assistance to ensure you are making the right choices when it comes to managing your on-going compliance. Get in touch to learn about our white glove service offerings!