Many eCommerce sellers have shared their struggles with sales tax compliance. It can be such a pain to deal with, but being aware of these frequently made mistakes can set you ahead of the crowd.
What mistakes you ask? Let’s take a look and see how to fix them.
Sales Tax Nexus Trouble
Most sellers are aware that by operating their business in a state means that they have to collect sales tax from buyers in that state. However, as your online store grows, it’s easy to establish sales tax nexus in other states without quite realizing it. Let’s explore some activities that will create nexus:
Employees–Hiring an employee in another state will create nexus. Sales people, even independent contractors, also create nexus
Storage–Storing your products in a warehouse or using a distribution center will create nexus.
Delivery Vehicles–If your company has delivery vehicles in another state or makes frequent deliveries, this can create nexus.
Temporary Presence – If you attend a trade show or craft fair in another state, you may establish sales tax nexus
The next step, if you know you have nexus is applying for a sales tax permit from the state’s department of revenue. You will need to do this first before collecting sales tax, but if you have already collected, check with a sales tax expert. They will have the answers when it comes to handling the unpaid sales tax.
You Didn’t Receive a Permit
It is illegal in most states to collect sales tax without a permit. We can’t overstate this, if you have nexus in a state, you will need to get a sales tax permit before you charge your buyers sales tax. Some states charge for this, while others do not. Some states will make you renew your permit, while others will not. Be sure to have a bead on what your state requires regarding your permit.
You’re Collecting the Wrong Amount
Many small business have issues when it comes to calculating sales tax rates. Rates can be more complicated than you think. Let’s say for instance, that you have nexus in Kansas and you sell to a customer in Wichita. Kansas is a destination-based state, so that customer’s rate would be 7.15%. However, if you sell the same product to a customer in Dodge City, their rate would be 8.80%. Kansas makes it even more confusing by having nearly 1,000 sales tax districts. There are 15 in Kansas City alone.
So Many Platforms, So Many Ways To Collect
As an eCommerce seller, you have many options when it comes to selling online. You can utilize Etsy, eBay, Amazon, your own website or hundreds of other platforms. The problem arises if you don’t have one or more of them set up correctly to collect sales tax. If you collect the wrong amount or no amount at all, you will be paying out of pocket to the state. Make sure that your platforms are set up correctly to collect sales tax in every state that you have nexus.
These were the four most common mistakes, but there are plenty more being made every day. If you have questions or an issue, talk to us in the comments.
Mark Faggiano is the founder and CEO of TaxJar, a service built to make sales tax compliance simple for eCommerce sellers. Mark’s passion is solving complex problems for small businesses. He previously co-founded and led FileLater to become the web’s leading tax extension service for both businesses and individual taxpayers before being acquired in 2010.
The Small Business Bonfire is a collaborative community for entrepreneurs that provides actionable business resources, tips and tools you can use immediately to help your small business succeed.
