A version of this article previously appeared Forbes.
One of the reasons I know way more about online sales taxes than I ever thought I would is due to Rincon Venture Partners’ investment in TaxJar, one of the leaders in this emerging space. Taxes may not be fun, but I am proud to be affiliated with a company that takes much of the pain out of the process.
January is coming up and you know what that means. Did you immediately think “a relaxing post-Q4 break?” Hopefully you’ll get plenty of rest during the Holidays because soon after the New Year starts, online retailers must begin contemplating sales tax deadlines.
If you haven't already subscribed yet,
subscribe now for free weekly JohnGreathouse.com articles!
Almost every online seller will have a sales tax deadline this upcoming January.
If you’re worried that you may not be getting sales tax quite right, fear not. The following sales tax compliance checkup will help you make sure you’ll start 2016 on the right track.
Your Sales Tax Compliance Checkup
Whether you’re never paid sales taxes before or you’re a seasoned expert, this checklist will help you stay on the right side of the law when it comes to sales tax compliance.
Get in the Right “State” of Mind – When most people think tax, they think “IRS.” But there is no federal sales tax, and the IRS actually has nothing to do with it (YET!). For now, online sales taxes are administered by individual states.
In specific terms, forty-five states and the District of Columbia have a state sales tax, and each has differing laws and regulations regarding rates, deadlines, filing requirements, etc.
Determine Where You Have sales Tax Nexus – Online sellers are required to collect sales tax in states where they have sales tax nexus. “Nexus” is just a fancy way of saying “significant presence.” Business activities that cause nexus in a state can include:
- Your Home – If you live and work there, even if you only run your business from your kitchen table, then you have sales tax nexus
- A Location – An office, storefront, factory, distribution center or even products stored in a warehouse can create nexus
- Personnel – An employee, contractor, salesperson, or installer can create nexus
- A Drop Shipping Relationship – Sometimes drop shipping can create nexus for your business
- A 3rd Party Affiliate – Some states consider that 3rd party affiliates who send you business in exchange for a small cut of the profit create sales tax nexus
- Temporary Business Activities – Sell at a trade show or craft fair? You may have created sales tax nexus.
Oh Crap, I Have Nexus. Now What?
If you are not sure you have nexus, check out this state-by-state list of activities that could have negative tax implications on your business.
Register for a Sales Tax Permit – Once you’ve determined you have sales tax nexus in a particular state, register for a sales tax permit in that state. Be sure to obtain the permit before you start collecting sales tax from buyers who reside in the state because most states consider it unlawful to collect sales tax in their name without a permit. Here’s a guide on “How to Register for a Sales Tax Permit in Every State.”
Set Up Sales Tax Collection – Next, make sure you are collecting sales tax from all the buyers in states where you have sales tax nexus. Most shopping carts allow you to set up sales tax collection, but it is a manual process. Just remember to set up sales tax collection from buyers in all of your sales tax nexus states and on all the different shopping carts / online marketplaces from which you sell.
Simplify Sales Tax Reporting – Almost all sales tax filers will have a January sales tax deadline. Before you can file, you’ll need to report how much sales tax you’ve collected from buyers in each state.
If you do this the old fashioned way, it may mean pulling a sales tax report from each of your shopping carts and trying to manually combine them. To make matters worse, almost all states want you to break down how much you’ve sold by county, city and other special taxing districts. In the past, this has meant juggling multiple reports, creating massive spreadsheets and then spending hours poring over tax tables. Fortunately, sales tax automation tools have greatly simplified this process.
File Sales Tax the Easy Way – The January sales tax filing due date will be here before you know it. Make sure you get ready and pay on time or you could face fines and penalties. Some states even require you to file when you don’t owe a payment. Hey, no one ever said taxing authorities were rational! Don’t be a vendor that is forced to pay a $50 penalty on a $0 sales tax due bill. Tools that help you calculate what you owe can also automate your sales tax filing, so you’ll never have to worry about penalties or late fees again.
Make this Headache Go Away with Sales Tax Automation – Sales tax is complicated but new technology can help you simplify your sales tax compliance. Sales tax automation will do everything from helping you determine where you have nexus, to reporting how much sales tax you’ve collected, to filing your sales tax for you. Automate your sales tax hassles so you have more time for the profitable (and fun) aspects of your business.
Follow John’s startup-oriented Twitter feed here: @johngreathouse.