Top 10 sales tax strategies for small businesses

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Many of us dream of running our own business and when we act on that dream, the life of joy we envisioned can quickly turn to pain if we fail to adjust to ever-changing tax requirements. Some of the more recent tax changes apply to simple sales tax, which becomes not so simple for those with a sizeable number of online sales or high dollar amount of online sales in multiple states. If this is your business scenario, the following 10 strategies for dealing with sales and other business taxes will help you maintain or bring back the joy of running your own company.

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1. Know where to collect & report

In the past, retailers typically needed to register, calculate, collect, and report sales tax in jurisdictions only where their business had a physical presence. This presence provided the minimum connection, or nexus, needed for a state or local to require tax registration, collection and reporting from retailers. The 2018 U.S. Supreme Court ruling in South Dakota v. Wayfair, 585 U.S. ___ (2018), however, broadened nexus to include economic presence and immediately triggered other states to enact or begin to enforce their own economic nexus laws. For a current list of economic nexus laws, by state, see the Supreme Court Tax Decision – Online Tax Laws by State. In reviewing the article, you may notice that many states base their new economic threshold on the:

  • dollar amount of sales or number of transactions; or
  • dollar amount of sales and number of transactions

To complicate the matter even more, the definition of “sale” is not uniform among the states, and can vary between gross, retail, or taxable sales.

Business license tax

New jurisdictional sales tax responsibilities may also trigger new Business License Tax liabilities, albeit often low dollar. Nonetheless, not understanding your tax requirements can create administrative headaches and detract you from focusing on your true passion, your business. When dealing with a tax agency directly to understand your sales and other business tax obligations it is often best practice to request the agent direct you to the written guidance on the revenue agency website to help avoid any misunderstanding or miss-guidance.

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2. Review Marketplace Facilitator agreements

In light of the Wayfair ruling, many states have enacted, or are in the process of enacting, new rules with regard to Marketplace Facilitators. Make sure your facilitator agreements stay compliant with these tax changes.

1099-K impact

Sales via a Marketplace Facilitator may result in the facilitator issuing you a Form 1099-K, reporting gross payments received from the facilitator on qualifying sales. If facilitators are responsible for reporting and paying sales tax on your sales via their online portals then make sure the 1099-K received is not overstating your income by the amount of this tax. If it is, then request an amended 1099-K. Otherwise, you could be stuck with the mess of having to reconcile your 1099-K reported income with a tax agency.

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3. Know what you sell – then apply the right rate

Whether you are the business owner or only deal with the accounting and tax issues for the company, you should always understand what it is the business is selling in relation to the sales tax rules. Sometimes, what you think is exempt might actually be taxable, depending on the jurisdiction. If you provide a service along with the sale of goods, the service may be included in the tax base but may be exempt when provided alone. The key, know what you are selling and check your state(s) taxability rules to avoid any audit assessments down the road.

Sales tax calculator

Even if you sell standard taxable goods, for multi-state sellers it can be overwhelming to keep up with sales tax rate changes that are constantly happening throughout the US. To ease this burden, consider using a reputable sales tax calculator (including our sales tax calculator), which provides current sales tax rates for all of the more than 10,500 US state and local taxing jurisdictions.

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4. Manage exemption certificates

Not all sales that qualify for an exemption are exempt on their face. Often, exemptions apply based on the buyer (e.g. non-profit) or the intended use of the goods sold (e.g. resale). To support an exemption in these instances, a seller must obtain a properly completed exemption certificate from the buyer. Trouble arises when something about the certificate is wrong or the exemption period listed on the certificate has expired. If you have exempt sales based on receipt of a properly completed exemption certificate, you must create a process for storing the certificates and, prior to exempting any sales based on a certificate, make sure the certificate provided is one the applicable state will accept. Otherwise, you could be stuck paying for uncollected tax, plus any penalties and interest imposed by the state.

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5. Account for use tax due on business purchases

Sometimes small businesses purchase goods for use in their business without paying any tax. If this is you, remember that there might be an obligation to self-assess use tax on the purchase. Continued failure to report use tax by small businesses may trigger an audit. The key to avoid mishap is to set-up a process to catch and report applicable use tax on purchases.

Personal property tax

Align the process for use tax accrual with any state/local Personal Property Tax compliance, if applicable, to help with tax abatement and filing deadlines.

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6. Know when to file – and pay

When a business registers to collect and report sales and use tax, the tax authority provides a notice to the business of the proper filing frequency and will issue notices per tax type if a jurisdiction treats tax types differently (IE: sales or use tax).

Filing frequency

The filing frequency defines when tax must be reported and paid to the tax authority. It is usually based on revenue and typically set to monthly, with tax due on or before the 20th of the month following the period reported. For example, an October monthly return may be due on or before November 20. 24 States have worked to unify their filing rules under the Streamlined Sales Tax (SST) and require monthly filing, but those filing rules only apply to certain sellers. The key here is to remember that every tax jurisdiction has its own filing frequency thresholds and your initially assigned frequency can change.

Tax type considerations

Many states, like Massachusetts, administer tax on sales the same way regardless of where the sale originated. Further, if a business needs to self-assess use tax on purchases, that tax is often also reported on the sales tax return. Some states, however, differentiate tax administration by tax types:

  • Sales tax – intra-state sales; occurring within a state;
  • Seller’s use or vendor’s use tax – inter-state sales; occurring between states;
  • Consumer’s use tax – on purchases for which tax was not properly paid.

Jurisdictions with tax type distinctions typically require separate registration and reporting, per tax type. Even when businesses report different tax types on the same return, they must make sure to report each tax type on a separate line. Reporting for the correct tax types every month, in every state always helps small businesses minimize out-of-pocket tax expenses.

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7. Know how to file – & pay

More and more states are moving from paper to an electronic process for reporting and paying sales tax. Make sure to follow these e-requirements or states may assess penalties, even on zero-dollar returns.

Also, remember that states can make mistakes or have technical “glitches.” Save your online confirmations, as well as proofs of mailing and cancelled checks related to paper submissions, so that if there is a mistake, you can use that proof to eliminate penalty or interest assessed for late submissions.

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8. Claim filing discounts/allowances – don’t leave money on the table

Many states offer a collection allowance or timely-file discount, regardless of whether filing returns electronically or by paper. When a discount is available, claim it. There is no point in leaving money on the table. When claiming discounts, however, be careful that your business is reporting under the correct tax type because not all jurisdictions allow a discount for every tax type.

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9. Create tax compliance calendar – for all taxes

How can small businesses keep track of filing frequency and due dates in every jurisdiction where they are required to report, especially as that number grows? One way is to set calendar reminders, including special rules for payments. If filing by mail, it is important to note which jurisdictions treat the return and payment timely if postmarked on or before the due date or measure timeliness based on the receipt date, an issue common for Alaska locals, for example.

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10. Receive, timely review & respond to DOR notices

Small businesses never want to miss a DOR notice or fail to timely act on a notice as required, especially an audit notice. If you have an online DOR sales/use tax account, make sure your business name, address, phone and email are current. If you authorize the DOR to send notices via the online account, set-up a process to also receive hard copies, by mail. Once you get a notice, read it and respond in accordance with the instructions and timelines contained in the notice.

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As your business grows in the e-commerce market, things can get very complicated and hard to keep track of for small businesses. Consider these 10 strategies for dealing with sales tax and a few other business taxes. It will help you retain or bring back the joy of running your own company. You can also consider the use of an automated sales tax solution such as QuickBooks Sales Tax to help manage the nuances of sales tax laws, reduce the risk of error, and minimize the likelihood of a sales tax audit.

This article originally appeared on the Quickbooks Resource Center and was syndicated by

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