Running a successful business requires an adequate understanding of pricing. Your business needs to sell its goods and services for a price that customers are willing to pay and that satisfies your business's financial needs.
When it comes to setting prices, retail sellers need to factor in sales tax. Thanks to new legislation, this is especially important for e-commerce businesses. 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 recent Supreme Court ruling in South Dakota v. Wayfair Inc. adds complications to e-commerce companies doing business nationally. The decision enables 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 now 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."
Fish expects other states to set similar parameters to South Dakota in terms of the minimum dollar sales amount and transactions needed to enforce the tax. Other experts have shared similar sentiments. If your small business mails three $15 items across the country, it's unlikely that any state will create a law where purchases that small result in paying a sales tax, but those selling larger amounts need to take note.
With the ruling coming down in late June, there's still a lot left to play out. In the meantime, find out how to prepare your business for what's to come. Follow these general tips for managing sales tax.
How can I prepare?
"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 capable of helping manage the complexity of many different sales tax laws is crucial. This doesn’t mean your company needs to immediately purchase new software to adjust to the new laws, though. There is still a lot to be decided, and several states are in the process of implementing new sales tax legislation. There's no shame in taking the time to let the dust settle, while searching for the best POS, tax and accounting software services for your organization.
For small businesses reaching the minimum sales thresholds, it's going to take thorough preparation to ensure you're ready for 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. It becomes even more difficult when states have given little to no insights into their plans regarding online sales tax.
E-commerce business owners can prepare for these unclear 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. This means you'd assume other states would enact the exact standards as South Dakota. If you exceed the threshold, make a note to monitor the state 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 in South Carolina every year, you should frequently check South Carolina sales tax laws for changes. If you make an average of 10 transactions for $200 dollars in Montana annually, it's not worth taking the time to review the state's sales tax policies. Prioritize 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."
Editor's Note: Looking for information on POS systems? Use the questionnaire below and our vendor partners will contact you to provide you with the information you need:
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 single state has its own rules and procedures. You may be dealing with several different 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."
As a business owner, your next steps following the South Dakota v. Wayfair Inc. decision should be monitoring state sales tax laws and looking into automated systems capable of filing complicated tax returns. The Supreme Court's ruling complicates things for smaller e-commerce businesses, but handling the changes is doable.
Additional reporting by Nicole Fallon. Some source interviews were conducted for previous versions of this article.