The information in this article is up to date through tax year 2019 (taxes filed in 2020).
In the constantly-evolving space of sales taxes, maintaining compliance is quite the undertaking. With multiple levels of tax codes including local, state and federal, even the savviest taxpayers and business owners run the risk of falling out of compliance due to updates to tax law.
At TaxSlayer, we want to ease your worries about these laws by outlining key areas to address through our sales tax compliance checklist. The following is a starting point, rather than a comprehensive list, but nonetheless provides a framework for how to organize and strategize your sales taxes for compliance.
Monitor nexus rules
Nexus which is also referred to as “sufficient physical presence” is a legal designation stating that companies doing business in a given state must collect and pay sales taxes to that state. While that seems straightforward, each state has the jurisdiction to define what nexus is and that varies, with factors like having a physical presence in the state, storing inventory in the state, or that state’s definition of a salesman impacting the definition.
Nexus rules and regulations specifically impact online retailers and are ever-changing so understanding your company’s nexus is step one:
- Understand where your company has nexus and any state-specific rules that apply there
- Register your business in states where it is required
- Know where your business may have created nexus in a new state based on things like traveling salespeople, property ownership, leveraging contractors or participating in trade shows.
- Avoid being at risk for audit due to out of date practices or changes to nexus rules that require you to take action
Be aware of consumer use tax
Use tax, contrary to sales tax, is the responsibility of the buyer to report. Use tax applies when a person or company purchases something for tangible personal property and they either pay less than the appropriate sales tax rate or do not pay any at all. This includes items removed from a company’s inventory.
Failing to report use tax can increase your risk of an audit so make sure to account for this accrual. Also, avoid removing purchasing items from inventory without either paying the necessary sales tax or remitting a use tax to the state.
Stay up-to-date with exemption certificate rules
The ways that your company can claim exemptions vary from state to state. To further complicate things, state legislators constantly lobby for changes to what their states can exempt from sales tax. To ensure that you remain compliant, maintain an audit trail for your exemption certificates and always keep your product and service exemptions up to date with current regulations everywhere you have nexus.
You should also make sure you have an easy way to generate a report of your company’s exemption certificates. This will not only keep you on top of your sales tax situation but will also decrease your chances of being audited for inaccurate or incomplete data. Any missing or expired exemption certificates will raise red flags.
When to remit your sales and use taxes
States have varying tax forms and schedules for when taxes are due. It’s important to track these numbers, but it’s equally as important to remit those taxes to the appropriate states in a timely manner.
Compare your filing schedule with your company’s revenue, since that drives the schedule you must adhere to. Keep up with any changes in your filing schedule to avoid penalties. Also, keep a close eye on e-filing regulations in the states where you have nexus as these often change. Things like failing to prepay when required, paying the wrong jurisdiction or paying late can increase your chances of being audited.