We all know the old saying, “Nothing is certain but death and taxes.” That old saying, however, isn’t true when it comes to one of the most befuddling taxes of all: sales tax.
Put simply, sales tax is a tax on the receipt from sales of a product and, in some cases, a service. Merchants collect sales tax from buyers and remit the tax collected back to the appropriate state, which uses it to fund state programs, departments and budget items.
If you own an online business, chances are that you’re going to need to address sales taxes from multiple states sooner rather than later. Chances are even better that the experience will be confusing, frustrating and time-consuming.
Here’s why sales tax can be an entrepreneur’s worst enemy, and how you can tackle it into submission.
How Sales Tax Brings the Pain
1. Every State Is Different
Forty-five states and the District of Columbia have a sales tax, and every state has the right to govern sales tax as it sees fit, which usually translates into each state trying to collect as much tax as possible.
2. Some Products Are Taxable, While Others Aren’t
In addition to taxable and tax-exempt items, some goods are taxed at different rates, which can vary by state, county and municipality. For example, in most states, consumer goods are taxable while services usually are not taxable. But this isn’t always the case. Grocery items are tax-exempt in Connecticut and in New York, and articles of clothing are tax-exempt, but only if they cost less than $110.
3. Tax Rates Vary Throughout States
A few states only have one sales tax rate. For example, the current sales tax rate in Massachusetts is 6.25%. So if you have sales tax nexus in the Massachusetts Commonwealth, you are required to collect sales tax from buyers who reside there at the rate of 6.25%.
However, most states aren’t as simple as Massachusetts. They allow counties and cities to collect sales tax, too, and some states even have special taxing districts. This complexity creates confusion regarding how much sales tax to collect and from whom.
4. You May Have to Collect Sales Tax From Buyers in Multiple States
Speaking of “sales tax nexus,” most merchants understand that they must collect sales tax from buyers in the state where their business is located. As a seller, however, you may also be on the hook to collect sales tax from buyers in other states where you have “nexus,” defined as a “significant presence” in a particular state. That presence can be construed to be an employee, contractor, a warehouse or other ties to a state. Not surprisingly, almost every state has a slightly different definition of nexus.
5. Sales Tax Gets More Complicated as Your Business Grows
Hire a new remote employee? Store your goods in a warehouse to be closer to your target customer? You may have to collect sales tax from buyers in new states.
Then There’s Sales Tax Reporting
Do you sell on multiple channels like eBay, Amazon FBA or your own homemade shopping cart? If you sell to multiple sales tax jurisdictions, then you’re likely responsible for preparing and submitting sales tax reports to each jurisdiction’s tax authority by the correct filing due date. Without sales tax automation solutions, this can involve spreadsheets, tax tables and complex formulas, all of which takes time away from you running your business.
When filing these reports, there are two important aspects to be aware of:
1. Sales Tax Due Dates Vary
In most states, merchants pay sales tax either monthly, quarterly or annually, depending on their volume of business in the state. But this means that some merchants may end up paying sales tax monthly in a few states, quarterly in a few other states and annually in others.
Not to mention, sales tax is often due on various dates during the month, and “quarterly” doesn’t mean the same thing to every state. Even if you maintain a meticulous calendar, it’s easy to miss a filing deadline.
2. States Are Broke, and Merchants Are Suffering
To add insult to injury, many states are fiscally strapped and are searching for new sources of revenue. Because of this, many states are raising sales tax rates—which means sellers need to keep up with the changes—and are finding new ways to create sales tax nexus for out-of-state sellers. After all, out-of-state sellers can’t vote state lawmakers out of office.
With all this pain, how can entrepreneurs make short work of sales tax?
How to Embrace (And Learn to Love?) Sales Taxes
These days, technology assists entrepreneurs in what were once tedious, time-consuming tasks, and sales tax is no exception. Sales tax automation services take the place of sales tax reports, spreadsheets and tax tables. If you’re a QuickBooks user, sales tax automation is likely just one integration away.
These days, a merchant can quickly and easily see all sales tax collected in a state, county, city and other special taxing district at-a-glance. Automation makes it easy to put a lid on sales tax, because, let’s face it: collecting and remitting sales tax is a necessary evil, but not a moneymaker.
So, using a sales tax automation service to simplify the process saves the time you could use on other tasks—like finding your next bestselling product!