Sales tax is not something top of mind for most executives, but it is something that the majority of businesses will have to manage at some level. No matter the size of your business, if you are selling a taxable product or service and establish nexus in specific states or jurisdictions, then you have a sales tax obligation. While it is not meant to be a burden on the seller, many businesses have been left scrambling to understand how to manage the complex process of sales tax compliance. There are many moving parts and as states continue to make adjustments to their statutes, it is important to stay in the know.
We’ve compiled a list of 6 common mistakes we see as businesses try and manage their sales tax compliance process.
1. Not evaluating your nexus as your business evolves
Nexus can be determined by either a physical or economic presence. As your business evolves; (new sales, new products/services, additional offices, new employees etc..) you could establish nexus without realizing it. Economic nexus has become the biggest discussion since its’ inception in 2018, but you can’t forget about physical presence. Adding employees, storing inventory, or utilizing contractors in new states can also create nexus. Ensure a regular check-up is done to evaluate your nexus footprint.
2. Incorrectly assuming your taxability, or lack there of
If you establish nexus but don’t sell a taxable product or service, you are exempt from sales tax. Tangible personal property (TPP) is generally taxable unless specifically identified as exempt, but that’s not the end of the story. If you aren’t selling typical TPP, that doesn’t mean you are always exempt.
Services tend to not be taxable, but this is changing state-by-state almost daily. For many years, SaaS businesses thought they were escaping sales tax rules, but that is no longer the case for many states. 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 started taxing technology, digital goods, software, and SaaS. Check out our SaaS map to get a glimpse into which states are taxing SaaS today.
Ensure you have a clear understanding of where your products or services are taxable and where they may not be. The answer may not be as simple as you thought.3. Not keeping an up-to-date tax calendar
When filing sales tax returns, due dates can include the 7th, 10th, 15th, 20th, 30th and the last day of the month (without considering the odd due dates for certain states). Returns are typically due monthly, quarterly or annually and usually set when you register, but may change periodically.
It’s critical to maintain an accurate tax calendar that reflects where your business is registered for sales tax purposes, the filing frequency of each return, the e-file login credentials, and other state-specific information. This tax calendar is not a static item, it will need to be maintained and updated over time as your filing frequencies may change or you may register in additional state or local jurisdictions.
4. Believing your compliance process is a set it and forget it process
Sales tax is constantly evolving, and that includes how you manage it. From rate changes to taxability rules, to how you file, when you file and where you file, a small change can lead to big problems.
Many sales tax automation platforms claim they do it all for you, and to a degree they do, until there are changes to be made. They lead you to believe that sales tax is a set it and forget it task, but if you are not monitoring nexus, tax calendars, notices and more than you could be missing big changes and be putting your company at risk. Within these automation platforms, those tasks are left to you to manage and update. Ensure you know that your sales tax compliance process is evolving and can’t be set up and forgotten about.
5. Not validating your sales tax exemption and resale certificates
An exemption certificate is used to exempt an otherwise taxable transaction from sales tax. The most common exemption certificate is a resale tax exemption certificate (aka a resale certificate).
If you can’t produce a valid resale certificate for a transaction with a buyer/customer, an auditor is likely to assume the transaction was taxable. It’s critical for you, the seller, to maintain copies of these resale certificates – and to make sure they’re correct. Validation of resale certificates is a piece of the compliance puzzle that you don’t want to skip.6. Not monitoring state and jurisdictional correspondence/notices
Jurisdictions enjoy sending you mail. Some of this mail may be informational but still critical. For example, you may receive a notice of a change in filing frequency from quarterly to monthly.
If you miss this change, and skip two monthly returns, you will be penalized. Additionally, you may receive a deficiency notice that requires you to correct an issue. These deficiency notices generally have very tight time frames by which you must respond – 5 days, 10 days, etc.
All sounds easy right? Yea, not so much. Your filing and reporting process for sales and use tax can be quite a burden for businesses managing it internally, and even for businesses bought in to a “do it for you” platform that has left them to manage the changes.
Outsourcing these obligations can be a great way to remove the burden of keeping up with the continual changes while being able to rely on an expert to guide you to make the best decisions for your business. Get in touch to learn how TaxConnex can manage your sales tax filing process for you!