While stories about families sadly being separated at the border dominate headlines, the unfortunate truth is that this will not affect the vast majority of us as we go about our daily routines. One thing that will affect nearly every single person is the Supreme Court decision for South Dakota v. Wayfair released on June 21st, 2018. It will impact the wallet of nearly every American going forward. This ruling gives every state the ability to tax online retail sales even if the company does not have nexus in the state they are selling to.
What is nexus? The traditional nexus definition basically means a business has operations within that state. That’s generally accomplished by one of three ways, although there are other stipulations that vary by state.
- Physical Location(most common)
- Employees or inventory within the state, including traveling sales personnel
- Delivering products into the state via company vehicle.
Clearly most online retailers would not fit into these 3 standard requirements. Many of us have ordered products online and it’s generally delivered via USPS, Fedex, or UPS so most online retailers avoid #3.
But let’s say you have a small, but growing online business selling handmade crafts to customers across the country via your website. While it’s likely you collect tax in your home state(unless you live in one of the 5 states that do not assess a sales tax) your entire tax compliance burden just became a lot more complicated.
I’d expect just about every state to get on board with the increased ability to collect taxes. The laws are likely to be all over the place for each state. Some states will pass de-minimus rules with sales thresholds under a certain amount will not require registration. But State A might have a threshold of $100k/yr, and State B might be at $10k/yr. Not to mention any other stipulations they put in.
I’ve outlined steps every small business owner will need to take in order to ensure they’ll be ahead of the compliance game.
Determine tax collection programs, policies, and procedures available from your state
- Find out if your state is part of the Streamlined Sales & Use Tax Program. Currently 24 states participate in the program. What it does is offers simplified reporting requirements, and collection efforts for all states involved. There will be specific rules that you can follow to help make life easier. However this is just one of your starting points.
- Determine if your state offers “Audit Immunity” – “This possibly can’t exist” were probably the first words out of your mouth! Well it does. This “immunity” can vary to some degree by state, and the actual immunity can be limited. All it generally requires is you work with one of their Certified Service Providers(aka tax software company). This will help you with one of our next strategies.
- Determine if you need to register and do it. If you’re not sure consult a professional. Get a hold of us through the contact page, or dial directly – (773)609-4755
Keep A Separate Bank Account
Sounds crazy, but you’ll be better off if you open a separate bank account for the taxes you collect, and remit to state tax departments. This will allow you to more easily reconcile your tax collections, and if you are ever under audit you can show your records to a tax auditor while possibly avoiding giving them every single transaction that runs through your business. For one thing it will show you take tax collection seriously which does count for something in their eyes. Second it makes an auditor’s life easier, and allows them to finish a review faster(they are under time pressures too). Might be obvious, but you’ll also want to make sure you set this up properly in your accounting software. If this seems inconvenient then get a good spreadsheet going to start tracking sales tax you collect, and reconcile it versus the bank account.
Outsource Your Sales Tax Collection – I’m an entrepreneur too, and I understand we wear many hats. However tax compliance is not one you should wear. Honestly I do my own tax compliance, but that’s only because I was a State and Local Tax industry expert earlier in my career so I know the in’s & out’s. There are a surprising amount of sales tax collection software companies out there. Finding the right partner now will save you a ton of hassle & money later. For one if you goof up on what you should have collected from a customer the money comes out of your pocket at the end of the day. So that’s a big incentive to get things right. If you followed my previous tip you can narrow your search to the Certified Software Providers specific to your state. Simply contact the company sales team to start a conversation. Then choose the company that offers the best combination of services, price, compatibility, and other criteria you use when determining providers to work with.
Stuck between choosing 2 providers? No problem. Use my free product comparison spreadsheet that I use to compare products from different companies.
If you have a CPA firm performing tax compliance now is a good time to have a discussion about the process for your company, and possibly leveraging any pricing details you’ve gleaned from other service providers. Hey it’s just business!
Know Your Product
Or I prefer the acronym KYP. The aforementioned small but growing e-commerce homemade craft is basically guaranteed to be subject to a sales tax in each state that imposes one. But let’s say you sell a slick mobile phone app that allows you to find bike trails nearby. Since software is not a physical product nowadays it’s generally not subject to tax. However this is where it becomes essential to know if a state has deemed software a taxable digital product. It’s issues like this that will require research into each specific states guidelines, and the rules vary significantly. This is when you’ll need to find someone with the knowledge and research capability to ensure you are compliant. Just so happens MAD Wealth has that expertise – contact us.
Ask For Forgiveness
There is an old saying, at least one my Dad didn’t tell me until I was older, that it’s better to ask for forgiveness than permission. If you know, or suspect, your business is not in compliance with current tax laws now is a good time to check if your state is offering an Amnesty program. Generally these programs allow you to remit any tax due with the possibility of zero/reduced penalty, reduced interest charges, and in some cases limiting the tax department’s ability to audit the reported periods. It’s the confessional of tax church. All past sins are absolved, and you can focus on the future.
Take all the above and combine it with your decision making process if you plan to expand, or open a new location for your business. Focus your efforts on areas that have the most favorable tax status to your specific industry, and that should help ease the burden. When in doubt feel free to contact us.
