Almost all states have a sales tax, only a handful don’t (Alaska, Oregon, Montana, New Hampshire and Delaware). Because of the variety and complexity inherent in sales/trustee taxes in every state you need to make sure you are correctly accounting for sales tax in your books. Sales tax is considered a “trustee tax” meaning it is collected from your customer, held in trust by the business owner and remitted to the state/city at regular intervals. The burden of calculating, collecting and remitting sales tax falls on the business owner and the tax authorities are very unforgiving of mistakes when it comes to this responsibility
Now that you have collected sales tax, you need to report and pay. Most states require you to file a tax return, remit the sales and use the taxes collected on a regular basis, usually in monthly or quarterly increments. In addition, there may be multiple local tax rates in some states that require different rates to be collected depending on where the income is sourced.
Feeling overwhelmed? Great because now we talk about what happens if you have MULTIPLE states needing sales taxes collected. This is very common for e-commerce and Software as a Service business and can lead to massive data reconciliation needs often too large for a small or mid-size business to handle on their own. If you do a small amount of business in each state/country then you may be safe from sales tax reporting merely because your business is too small to notice, but this does not necessarily exempt you from sales tax liabilities. State authorities may claim you have “nexus” upon examination of your income and request you remit taxes to them.
This brings us to another issue.
Nexus: what the heck is it?
“Nexus” is created when the following occurs during a 12-18 month period:
1. You maintain an office, store or other business facility in the state
2. You or your employees enter the state to take orders, perform services, or otherwise do business on your behalf
3. You own or lease real property in the state
4. You own or lease personal property that is a store or used in the state on a more than an occasional basis.
5. In some cases, total income can trigger nexus; for instance in Washington state claiming more than $250,000 of income in the state creates nexus, regardless of the answer to the preceding requirements.
Sales and Payroll Taxes are the #1 penalized taxation events we at GPL deal with and they can both cost business owner thousands in penalties and interest depending on when they discrepancies are discovered and corrected. Absorbing that cost can often be devastating to small or mid-size businesses and increase scrutiny from other tax authorities, leading to potentially more auditable actions.
We suggest meeting with a tax and accounting specialist to assure you are recording and reporting your sales tax liabilities each period. By conferring with such a specialist you are basically purchasing insurance against audit; insurance that much like your car or home insurance can keep you from becoming destitute when or if you are audited by state authorities. Audit defense starts at 300% the cost of regular hourly accounting in most instances, and for some defenses that expense is still orders of magnitude smaller than the penalties and interest assessed on sales tax.