The Supreme Court’s recent decision in South Dakota v. Wayfair has redefined sales tax, and every business selling online will need to assess its impact. Interpreting the implications of new policies across different states is far from the only sales tax challenge small businesses will face in 2018. Changing tax rates and rules, along with transaction and invoice data residing in multiple systems, will continue to complicate sales tax for the remainder of the year and beyond. As a result, many small business owners and operators are struggling to keep up with filing correctly.
There’s a better way. Here are nine tips to help your company avoid costly errors and audit headaches — and focus on growth and success.
1. Understand each state’s tax laws and know your nexus
According to the Sales Tax Institute, nexus historically has always been associated with a physical presence, and physical presence was the determining factor of whether an out-of-state business selling products into a state was liable for collecting sales or use tax on sales into the state. That all changed in June 2018 when, in South Dakota v. Wayfair, the Supreme Court ruled that physical presence was the wrong test and an “extensive virtual presence,” not physical presence, is sufficient for creating nexus. As a result, more states have started to pass sales tax laws and regulations imposing sales tax collection obligations based solely on the amount or number of sales made into their state. This is a tremendous change from the past and makes understanding your nexus in each state more important than ever. Nexus laws can be quite complex, and they differ from state to state.
With change the only constant, you must put in place a clear process for tracking evolving sales tax laws in each state and then identify the impact on nexus.
2. Heed changing filing requirements
Each state sets its own requirements for business sales tax filing and payments, with some states now requiring e-filing, especially for businesses with large tax liabilities. Only by knowing the available payment options and requirements in each state where your company has nexus can you avoid costly and time-consuming errors. For more information about filing and payment options for each state, go to www.taxrates.com/state-rates/.
3. Track required prepayments
More than 15 jurisdictions (at last count), including Pennsylvania and New York, require prepayment from some businesses. The larger the sales tax liability, the more likely you will need to prepay. Prepayments are typically made on a monthly basis but can sometimes be required as often as four times a month. To ensure accurate and on-time prepayments, you must develop a flexible filing schedule and update it regularly to capture changes.
4. Reconcile your sales tax payable account
To ensure accuracy over time, regularly reconcile your sales tax payable account with your source documents. Here’s how:
- Identify the balance of your account at the beginning of the accounting period.
- Add the total amount billed to customers.
- Subtract the total sales and use tax paid, either electronically or by check, and account for any discounts a state may offer…