Did you know there are changes taking place in the sales tax world that may increase tax reporting for many small businesses engaged in online sales? As your clients’ trusted advisor, it’s imperative that you share this new information with them.
For over 20 years, U.S. retailers needed a physical presence in a jurisdiction before being required to register, collect, and report the jurisdiction’s sales tax.
This standard completely changed in June 2018, when the U.S. Supreme Court ruled in South Dakota vs. Wayfair in favor of a South Dakota law requiring an out-of-state seller with more than $100,000 of goods/services sales or 200 or more transactions in South Dakota, annually, to collect and remit tax on sales into the state.
In short, the Court replaced the long-standing physical presence standard with an economic one, creating a new standard for states to follow when setting rules on the collecting and remitting sales tax.
In light of the Wayfair decision, small business owners in the e-commerce market may now be required to comply with multiple states’ sales tax rules and rates. Fortunately, software like QuickBooks® Sales Tax is here to help. The Sales Tax functionality inside QBO keeps up with changing sales/use tax rates and quickly and conveniently accounts for sales tax nuances in every state, including those on clothing, food, medical items, services, and software.
For the tax geeks out there, the real fun starts at filing time because, like rates and taxability rules, the reporting rules are also different everywhere. For the less enthusiastic, remember that failing to focus on sales tax, including filing and paying correctly, may lead to costly and more time-consuming issues down the road.
4 Steps for Filing Success
- Know where to file
- Know when to file . . . and pay
- Know how to file . . . and pay
- Claim Discounts / Allowances . . . don’t leave money on the table
1. Know where you have filing obligations. In the past, retailers typically needed to register, calculate, collect, and report sales tax in jurisdictions 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.
In the past, retailers typically needed to register, calculate, collect, and report sales tax in jurisdictions 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 ruling in Wayfair 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 listing of the economic nexus laws, by state, see the article titled, Supreme Court Tax Decision – Online Tax Laws by State. When reviewing the article you may notice that many states base their new economic threshold on:
- The dollar amount of sales or number of transactions in state; or
- The dollar amount of sales and number of transactions in state.
These are important things to keep in mind because they can make a difference when determining whether you meet a threshold or not. Additionally, when applying economic thresholds, keep in mind that the definition of “sales” in each states’ law can vary between gross, retail, or taxable sales.
2. Know when to file and pay your taxes. When a business registers to collect and report sales and use tax, the tax authority provides a Notice to the business of the Filing Frequency, per Tax Type, where the jurisdiction treats Tax Types differently.
The Filing Frequency defines when tax must be reported and paid to the tax authority. This frequency is usually based on revenue and often 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 using automated calculation and filing software. The key here is to remember that every state has its own Filing Frequency thresholds.
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 still reported on the sales tax return. Some states, however, differentiate tax administration by tax types:
- SALES TAX – applies to Intra-state sales; sales occurring within a state;
- SELLERS USE or VENDORS USE TAX – applies to Inter-state sales; sales occurring between states; and
- CONSUMERS USE TAX – applies to purchases for which tax was not properly paid.
Jurisdictions that make 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 the right Tax Type on the correct line. If businesses ignore Tax Types, they risk:
- Underpaying tax or incurring assessments for failing to file returns, triggering lost timely file discounts, as well as penalties and interest;
- Underpaying tax or incurring assessments for applying non-qualifying timely file discounts only relevant to one Tax Type; or
- Overpaying tax due to using the WRONG Tax Type rate
Reporting for the correct Tax Types always helps small businesses minimize out-of-pocket tax expenses.
Set a Calendar
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 clear 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, a common issue for Alaska locals, for example. It is also important to pay attention to Agency Notices, to be aware of any changes to File Frequency or reporting and payment rules.
Lastly, businesses must update registration information when business activity changes in a state/local. This makes sure the business reports the way the state wants them to and decreases the chance of out-of-pocket expenses associated with incorrect reporting.
3. Know how to file and pay your taxes. More and more states are moving from paper to an electronic process for reporting and paying. Make sure to follow all 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 canceled 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.
4. Know and claim all discounts and 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, remember, not all jurisdictions allow a discount for every Tax Type.
As your business grows in the e-commerce market, know that QuickBooks Sales Tax is here to help you remain tax compliant. When you are responsible for filing, remember the 4-STEPS to help make sales tax filing a success: know where, when, how to file, and pay and do not pay more than you have to by failing to claim qualifying discounts!