January is coming up, and you know what that means. Did you immediately think “a relaxing post-Q4 break?” Hopefully you’ll get plenty of rest during the holidays, because soon after the new year starts, online retailers must begin contemplating sales tax deadlines. Almost every seller will have a sales tax deadline this upcoming January, whether you run a brick-and-mortar or online store.
If you’re worried that you may not be getting sales tax quite right, especially if you sell your goods to other jurisdictions, fear not. The following sales tax compliance checkup will help you make sure you start 2016 on the right track.
Your Sales Tax Compliance Checkup
Whether you’ve never paid sales taxes before or if you’re a seasoned expert, this checklist will help you stay on the right side of the law when it comes to sales tax compliance.
1. Get in the Right “State” of Mind
When most people think tax, they think “IRS.” That’s natural, but you must remember that there is no federal sales tax, and the IRS actually has nothing to do with it. For now, online sales taxes are administered by individual states.
In specific terms, forty-five states and the District of Columbia have a state sales tax, and each has differing laws and regulations regarding rates, deadlines, filing requirements and more.
2. Determine Where You Have a Sales Tax Nexus
Online sellers are required to collect sales tax in states where they have sales tax nexus. “Nexus” is just a fancy way of saying you have a “significant presence” in a given jurisdiction (e.g. state, county, local government, etc.). Business activities that constitute a nexus can include:
- Your Home: If you live and work there, even if you only run your business from your kitchen table, then you have sales tax nexus.
- A Location: An office, storefront, factory, distribution center or even products stored in a warehouse can create nexus.
- Personnel: An employee, contractor, salesperson or installer can create nexus.
- A Drop Shipping Relationship: Sometimes drop shipping can create nexus for your business.
- A Third-Party Affiliate: Some states consider that third-party affiliates who send you business in exchange for a small cut of the profit create sales tax nexus.
- Temporary Business Activities: Sell at a trade show or craft fair? You may have created sales tax nexus.
3. Register for a Sales Tax Permit
Once you’ve determined you have sales tax nexus in a particular jurisdiction, register for a sales tax permit in that state. Be sure to obtain the permit before you start collecting sales tax from buyers who reside in the state, because most states consider it unlawful to collect sales tax in their name without a permit.
4. Set Up Sales Tax Collection
Next, make sure you are collecting sales tax from all the buyers in states where you have sales tax nexus. Most shopping carts allow you to set up sales tax collection, but it is a manual process. Just remember to set up sales tax collection from buyers in all of your sales tax nexus states, and don’t forget about setting it up on all the different shopping carts/online marketplaces from which you sell, if need be.
5. Simplify Sales Tax Reporting
Almost all sales tax filers will have a January sales tax deadline. Before you can file, you’ll need to report how much sales tax you’ve collected from buyers in each state.
If you do this the old fashioned way, it may mean pulling a sales tax report from each of your shopping carts and trying to manually combine them. To make matters worse, almost all states want you to break down how much you’ve sold by county, city and other special taxing districts. In the past, this has meant juggling multiple reports, creating massive spreadsheets and then spending hours poring over tax tables.
6. File Sales Tax the Easy Way
The January sales tax filing due date will be here before you know it. Make sure you get ready and pay on time, or you could face fines and penalties. Some states even require you to file when you don’t owe a payment. Don’t be a vendor that is forced to pay a $50 penalty on a $0 sales tax due bill.
Make this headache go away with sales tax automation. The tools that help you calculate what you owe can also automate your sales tax filing, so you’ll never have to worry about penalties or late fees again. Sales tax automation will do everything from helping you determine where you have nexus to reporting how much sales tax you’ve collected and filing your sales tax for you. Automate your sales tax hassles so you have more time to focus on the profitable parts of your business!