Managing sales tax for your small business can be a huge pain, but TaxJar can help alleviate that burden. The company’s founders have taken the time to understand the nuances of sales tax so you don’t have to.
Here are five of their top tips to aid your navigation of state sales tax laws.
1) You can’t ignore your sales tax obligation.
States need the revenue, and the government is gathering more information about your business. This data helps them understand your sales and your business, which could trigger an audit if they don’t think you are collecting sales tax.
2) “Nexus” is a word you should understand.
It’s a term the government uses to determine if you have enough of a presence in their state to require you to collect sales taxes. Usually, this requires a physical presence such as a store or a warehouse. But, if you sell on Amazon and use Fulfillment by Amazon, shipping your inventory to Amazon warehouses in different states, then it’s likely you have “nexus” in those states and would be required to collect and remit sales taxes.
3) Know your origin and destination state.
Most states can be categorized into either “origin” or “destination” based states for sales tax purposes. For origin states, sellers are required to collect sales tax in their local jurisdiction, regardless of where the buyer is located. Destination based is slightly more complicated. Regardless of the seller’s location, sales taxes need to be collected at the local rate where the goods are shipped. This creates two significant challenges. First, knowing the local rates where you ship (some states have hundreds of different sales tax jurisdictions), and second, filing those taxes to the state and reporting how much you’ve collected in each local jurisdiction. Tax Jar can help you navigate both of those.
4) These rules may change soon.
Sales tax laws may change with the Marketplace Fairness Act (MFA). The MFA is proposing that sellers should be responsible for collecting and remitting sales tax in all states where they sell product, not just the states where they have nexus. The bill was passed by the Senate and is currently being reviewed by the House.
However, key issues with the bill in its present form make it unlikely that the bill will become a law without significant changes. For example, there will need to be enhanced simplification of sales tax so sellers aren’t required to collect on over 10,000 local sales tax jurisdictions.
If the federal government passes the law, states will still have the choice on whether or not to enforce it, but it’s worth keeping an eye on.
5) Don’t be overwhelmed.
Running a business is hard enough, and having an overly complicated sales tax system doesn’t help. Do your best, and as long as your state (or states) realize that you’re trying to navigate their complicated sales tax rules, they generally are pretty willing to help where they can. Many even have phone numbers for their department of revenue or taxation with real people who can help answer questions if you feel confused or overwhelmed.
Reprinted with permission from TaxJar.