It’s almost Halloween and we have some sales tax horror stories to tell. Sales tax mistakes are easy to make, and the consequences are not pretty, as you will see.
Horror 1: Collecting Sales Tax Everywhere Before Registering
We’ve had more than a few clients come to us with a similar problem. They misunderstood the Wayfair decision and collected tax in EVERY state before they hit the threshold.
They were scared that they’d have to pay tax out of pocket if they didn’t collect. But they’d missed the fact that all sales before hitting a economic nexus threshold have absolutely $0 tax liability associated.
Collecting without registering is truly scary because businesses can’t legally collect sales tax on behalf of the states without the state’s authorization. Sales tax, after all, is a fiduciary tax.
If you do this, then you have a second problem… what to do with all the sales tax collected.
Some of our clients have collected 6 figures worth of sales tax and recognized it as revenue, which is illegal.
The recourse we took was to:
- Register in all the states
- Remit all the tax collected
Because this was done after the fact, most, if not all, the states assessed penalties and interests on the back filings and payments.
Bear in mind that all of this could have been avoided if:
- The businesses had properly understood when they hit nexus
- They had registered in those states BEFORE turning on sales tax collection
Horror 2: Not Understanding Marketplace Facilitator Laws Correctly
Marketplace facilitator laws require marketplaces, instead of individual sellers, to collect sales tax for two reasons:
- It eases the burdens of small business owners
- It makes it so states don’t have to process a large number of small-dollar returns and payments. It is much more efficient to tax the giant than the little guys, after all.
Some businesses, though, don’t fully understand when the marketplace facilitator laws go into effect in their states.
One client, in particular, thought Amazon was collecting and remitting on their behalf, when in fact Amazon wasn’t. So the client had to back-file many returns and pay penalties and interest for late filing, all out of his own pocket. Ouch!
Therefore, we encourage all of you to double check when marketplace facilitators start collecting and remitting tax for you in a particular state, because before that date, it’s still your responsibility.
Horror 3: Ignoring Other Tax Obligations Incurred by Sales Tax Registration
Let’s use Texas franchise tax as an example.
When you register for a sales tax permit in Texas as a remote seller, you also have an obligation to file Texas franchise tax returns. This return is filed on an annual basis, and data on the form needs to tie back to your federal business income tax filing.
We had a client that ignored the notices from Texas regarding their franchise tax filing liabilities, and Texas eventually put a lien on their assets and a hold on their sales tax permit.
Similar to Texas franchise tax, we also want to mention a few others to pay attention to:
- Business and Occupational (B&O) tax in Washington
- California franchise tax
- Commercial Activity Tax in Ohio
Horror 4: Manually Calculating Sales Tax
Before the Wayfair decision, remote sellers (online sellers) usually didn’t need to collect and remit sales tax to any states other than their home state.
Also, physical stores usually charge the single tax rate based on the store location (because that’s where the sale happened).
But since Wayfair, shipping addresses determine the tax rate and you need to have software in place to calculate sales tax in real time.
A client of ours built their custom website and kept a list of sales tax rates based on their current customers’ addresses. Whenever a new customer came in, they’d reach out to us to find out what the correct rate should be.
This slowed down the sales and billing process, and some months they weren’t able to charge sales tax, resulting in having to pay large amount of sales tax out of pocket.
We strongly recommend all ecommerce businesses to use a sales tax calculation tool that automates the process, instead of manually looking up rates every time someone places an order.
Horror 5: Relying Too Much on Sales Tax Software
Sales tax software is great when it comes to being the engine, but it’s hard to say when it comes to the function of filing a return.
One software in particular doesn’t have the capacity to remit excess tax collected to all the states. This is illegal! If businesses use this software and think they can just let the software automate everything, only realizing later that the software doesn’t remit everything they collected, they might have serious legal consequences.
Always audit your software and pick one that allows flexibility and user transparency.
We are here to help this spooky season and all the other seasons when you have a sales tax dilemma. Hope everyone has a great Halloween and not be haunted by your sales tax liabilities!