Sales tax filing can be complex and confusing. There is a patchwork of state and local sales taxes, meaning that your business could be collecting different rates from one town to another. Keeping track of the changing local rates, as well as the other provisions of sales tax law, can be a full-time job.
Here are seven ways to ensure that your company is compliant with sales tax filing.
Understanding State and Local Rates
Your business will need to be familiar with all of the state and local sales tax rates in the areas where it operates. Having a software or database solution can be helpful, as long as these solutions are updated quarterly with new laws and rates.
Business owners must understand the rates that apply to different types of goods and services. For example, in Massachusetts, clothing under $150 is exempt from sales tax. In Minnesota, food is exempt from sales tax, but in Tennessee, it is taxable.
Companies must be aware of the layers of taxation that apply to their activities in certain states. Many states carry a general tax rate, but towns and districts can also impose their own tax rates on top of the state levy. Frequently, there are multiple tax jurisdictions in one zip code. This means that a company must calculate taxes based on the exact street address. Companies need to be able to access a robust database that can calculate the proper amount of tax no matter where a customer lives.
Sales Tax Nexus
In 2018, a Supreme Court case (South Dakota v. Wayfair) found that states were entitled to collect sales taxes from companies without a physical presence in their jurisdiction. Sales tax nexus is calculated according to the volume of sales from each jurisdiction and the number of transactions performed. For example, South Dakota is now collecting tax from out-of-state businesses that do more than $100,000 in sales or have more than 200 transactions in a year.
Many other states have adopted this rule, but some states retain their own system of determining sales tax nexus. All companies need to be fully on board with the concept of sales tax nexus and understand how to comply with each state’s requirements, or they could face legal difficulties.
Maintain a Tax Calendar
Companies must maintain accurate tax calendars. These calendars should establish where a business is registered, how frequently the returns must be filed, the information needed to access the e-file sites for each jurisdiction, and other information that is specific to each state. Tax calendars must be updated frequently since sales taxes frequently change on a quarterly basis. Updating once a year is not enough.
Sales tax preparers must be able to file returns monthly. They should be ready to remit payment electronically or by check. They need to be able to keep on opt of all of the monthly notices sent out by state and local jurisdictions. These notices can build up and become a burden on tax preparers, so some expertise is necessary.
Understand the System
Sales tax preparers need to be well-versed in all pertinent laws. While some companies feel that they can use a stand-alone software solution to determine their tax liability, having a trained and dedicated preparer is the best way to protect against improper filing.
Find a Consultant
Having a dedicated sales tax consultant goes a long way toward bringing your business into full compliance with state and local laws. Sales tax consultants can manage not only changing rates but the day-to-day business of dealing with sales taxes, including monthly reports and communication with state and local tax authorities. Having a competent consultant on your side will help you handle sales tax issues with ease.
Compliance is a Must
Companies that do not remit the proper amount of sales tax could find themselves in legal jeopardy. To avoid costly legal action, companies must make sure that they are compliant with all sales tax laws. Using a consultant may be the best way to ensure that your company is operating fully within the law.