Monitoring legislation can be a challenge for small business owners juggling so many responsibilities. With state legislation regarding e-commerce sales tax changing monthly, it can be even more difficult to stay on top of the law. Fortunately, changes in several states have been implemented, and now your business can react to previous changes and prepare for impending alterations.
According to the Small Business Administration (SBA), "As a small business owner, you are required to assess sales tax, collect it and pass it on to the appropriate authorities within the prescribed time." Except for wholesale items, raw materials and sales made to nonprofits, U.S. retail businesses are required to collect sales tax on the goods they sell.
While the concept of sales tax seems simple enough, the Supreme Court ruling in South Dakota v. Wayfair Inc. added complications to e-commerce companies doing business nationally. The decision enabled states to charge sales tax to out-of-state sellers, which means you don't need a physical presence in a state to pay sales tax. In South Dakota, the state can charge sales tax to any business that delivers more than $100,000 of goods or services or totals 200 transactions on an annual basis. [Interested in online tax software? Check out our best picks.]
"This is a major change in the sales tax world," said Judah Fish, CEO of Saltwater Tax Group. "Many state laws will likely change in the coming months, as states will obligate online sellers to collect sales tax and restore one of their largest revenue streams."
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Fish, whom we interviewed in July 2018, was correct. States are implementing these laws, with many coming into effect in late 2018 or early 2019.
Fish believed other states would set similar parameters to South Dakota for the minimum dollar sales amount and transactions needed to enforce the tax. Other experts had similar predictions. We've seen this happen, but several states have added variations to South Dakota's terms.
If your small business mails three $15 products to a customer across the country, you don't need to worry much about these sales tax laws. It's highly unlikely any state will create a law where purchases that small result in paying a sales tax, but businesses selling larger amounts need to take note, especially with new regulations coming in the next few months.
How can I adjust to new sales tax laws?
"Along with the obvious changes that are going to need to be implemented from an accounting perspective, a huge portion of the impact of this decision is going to be technological," said Christian Gainsbrugh, the founder of LearningCart. "Many people take sales tax calculations for granted, but managing and calculating those rates behind the scenes is no small feat."
Large retailers hold an advantage over smaller sellers in this scenario, as companies like Amazon can throw money and employees at these issues to quickly adjust to changing laws and compliance issues. Small businesses with fewer resources will have a harder time remaining compliant with different sales tax laws, according to Gainsbrugh.
"Although some states like Maryland have a standard flat sales tax rate, some like South Dakota base it on the city, and other states like Washington calculate sales tax based on the county the purchaser is in," he said. "With the way county lines are drawn, you literally could have a customer on one side of a street with one tax rate, and another across the street with a completely different tax rate."
Technology can help small businesses with this tricky situation. Certain POS systems integrate with accounting software capable of processing different state sales tax laws. Shopify, Square, Clover, PayPal and Vend all offer sales tax solutions in addition to their POS services. [Interested in POS systems? Check out our best picks.]
"As the Supreme Court pointed out, there are software solutions that are available … that will help small businesses comply with these obligations on a multi-state basis," said Mike Dillon, the president of Dillon Tax Consulting. Dillon shared these thoughts on a webinar discussion hosted by TaxJar.
For retail businesses that are predominantly or completely online, having software to help manage the complexity of many different sales tax laws is crucial. For small businesses reaching the minimum sales thresholds, it's going to take thorough preparation and work to ensure you can handle the sales tax nuances of each state.
This is difficult for businesses selling in states that haven't yet adjusted sales tax laws to reflect the South Dakota v. Wayfair Inc. ruling. Luckily, many states have announced plans to change their online sales tax laws. These are the states with changes taking effect on Dec. 1, 2018 or Jan. 1, 2019:
- West Virginia
North Carolina implemented changes on Nov. 1, with some counties setting different tax rates, which only further adds to the complexity of making online sales in the state. It’s critical that small business owners monitor those different rates, even down to the county level, to remain compliant and follow the law.
Despite the added complications for online sellers, the laws aren't without benefits. Michigan believes it will gain roughly $200 million annually in extra revenue from the sales tax, which may be used to improve the state's roads. Alabama created the Alabama Simplified Sellers Use Tax Program to help businesses avoid the challenges of sorting through different county and city tax laws, according to AL.com.
On the flipside, the added complications have led to disagreements between several stakeholders. An article published by The Salem News highlights the pushback of several congressmen against sales tax legislation that can put a burden on small business owners. Small businesses need to continue to monitor changes as stakeholders constantly attempt to alter legal guidelines.
If a state hasn't updated its laws yet, e-commerce businesses can prepare for these uncertain situations by looking at their previous annual sales numbers in each state and using the South Dakota minimum sales threshold of $100,000 and 200 transactions as a guide. Many states have followed those monetary guidelines set forth in the Supreme Court case. Other states won't always enact the exact standards as South Dakota, but using those numbers as a guide will help you prepare. If you exceed that hypothetical threshold, make a note to closely monitor the sales tax laws in that state to remain compliant.
For example, if you notice you're selling more than $100,000 worth of goods or have more than 200 transactions annually in a state that hasn't adjusted laws since the South Dakota v. Wayfair ruling, you should frequently check the tax laws in that state for changes. If you make an average of 10 transactions for $200 in a state annually, it's not worth taking the time to review the state's sales tax policies. Prioritize the states where you sell the most.
"Although it may be tempting to put off, for many businesses there won't be a quick fix," Gainsbrugh said. "Ultimately, planning to be and staying compliant is going to be an ongoing process and something that will have to become a regular part of your business."
Compliance mistakes to avoid
"We all make mistakes," said Scott Peterson, vice president of U.S. tax policy and government relations at Avalara. "When you're a small business filing sales taxes, it's easy to do. After all, chances are you're not a sales tax expert."
Peterson shared three common mistakes small businesses make regarding their collection of sales tax:
1. Failing to keep track of different rules for different states. As mentioned above, every state has its own rules and procedures. You may be dealing with several due dates, filing frequencies, formats, late penalties and other variables, and it can be easy to mix them up, said Peterson.
"Making sure you are getting it right for each state also means making sure you are updated on the latest requirements, which can and do change," he added.
2. Reporting incorrect numbers. Many states require you to break down collections based on local jurisdiction, which adds another layer of complexity. Peterson noted that it takes careful computation and checking to make sure you are getting your numbers right.
3. Not filing because you didn't collect any tax. Don't think that if you didn't collect any tax, you don't have to file for that reporting period. Most states require you to file every reporting period, even if you didn't collect anything. Disregarding this requirement could result in late/non-filing penalties, said Peterson.
Compliance mistakes are out there waiting to happen, but properly managing sales tax responsibilities and staying informed gives you the best chance of avoiding trouble.
Tips for managing sales tax
One of the best things you can do to stay on top of your sales tax obligations is to keep meticulous records, said Luca CM Melchionna, a managing member of Melchionna PLLC. A good accounting solution can help you track your invoices and sales so you know exactly where your sales come from.
"Be sure to work with an attorney and a CPA with experience in this area," Melchionna said. "In many states, sales tax reporting obligations are recurring. It is important that small retailers maintain impeccable documentation at the time of each sale."
Peterson agreed, adding that it's important to track your specific filing frequencies and due dates.
"When you register with a state, you should be assigned a filing frequency (monthly, quarterly, annually or other)," he said. "These frequencies each come with their own due dates. Although the due date may officially be the same day of the month each reporting period, these can fluctuate due to holidays, weekends, etc. So, it's crucial to check the exact dates rather than just assume that you know when they are."
A few months ago, online sellers needed to start preparing for changes to state regulations. Now, states have implementing many changes, and small business owners need to react accordingly. Whether that means changing your POS system, adjusting your accounting practices or speaking with tax experts depends on your business. Regardless of how your business reacts to the changes, it's important to react before you fall behind changes.
With all that in mind, there's always the potential for more changes. Small businesses should continue to monitor online sales tax laws in the coming months and years, while also making the necessary adjustments to remain compliant.
Additional reporting by Nicole Fallon. Some source interviews were conducted for previous versions of this article.