5 Things You Need to Know About Sales Tax

Stick around and by the end, you'll know exactly what steps to take to protect your business and avoid costly mistakes. Let's dive in.

0:38 Where you have nexus and when to register

The first step is knowing where you have nexus and when you need to register. One of the biggest mistakes that ecommerce sellers make is not knowing where they have nexus, which means they don't register for sales tax in states where they should be collecting.

There are two main ways that you trigger sales tax nexus. The first is physical presence. Think people and property. If you have a warehouse, an office, inventory, employees in a state, then you probably have physical nexus there too.

The second is economic nexus. [unclear] with sales tax also have a threshold at which you are responsible for sales tax. Once your sales have exceeded that threshold, you are responsible to register and start collecting sales tax.

Here's what you need to do. Track your sales across all of your platforms. Amazon, Shopify, Etsy, eBay, everything. All of your sales count towards your nexus thresholds.

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For example, let's say that you sell $75,000 on Amazon into Arizona and $35,000 on your Shopify account into Arizona. That is over the threshold amount of 100,000. Now you will not be responsible to collect and remit the 75,000 from Amazon, but because that contributed towards crossing the threshold for all of your sales, you will be responsible for collecting and remitting sales tax on your Shopify sales.

Now it's super important to remember, you must register before you start collecting sales tax. It is illegal to collect sales tax without a permit.

And watch out for aggressive states like California, Illinois, and Texas. They are tracking down sellers hard and are even buying seller information so they can find businesses who haven't registered. Don't assume you're safe just because nobody has contacted you yet. States are becoming more and more aggressive and are starting to move hard on businesses who have not registered. The safe bet is to stay ahead of them.

2:31 The where, who, and what of taxability

The next thing we're going to talk about is the where, who and what of sales taxability. Sales tax isn't just about charging a flat rate. It depends on where the sale happens, who is buying and what is being sold. There's complexity in each of them, but you can kind of think of them as gates. Where unlocks who, which unlocks what. Let's break it down.

Where is first because location determines the tax rate. Sales tax is calculated on the ship to address. For example, if you're in California and you sell a product into Utah, not the California rates that apply, it's the Utah rates. Always set up your sales tax engine to collect based on the destination based rules for each state.

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Who is next because not every customer is taxable. Some businesses, nonprofits, and government entities are tax exempt, but only if they provide valid documentation. For example, a wholesaler buying from you in order to resell a product won't pay sales tax to you, but only if they give you a valid exemption certificate.

Here's what's important to remember. Always collect valid tax exemption certificates from tax exempt customers. Make sure you've set up your system to track these certificates so that you know when they expire, so that you can be sure that you're getting valid ones from your customers. If a customer won't provide you with one of these certificates, feel free to charge them sales tax, because if you are audited, you will be on the line for the missing sales tax.

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What is last, because some products are taxed differently. Most physical products are taxable, but some have special rules. For example, a board game is taxable in every state, but clothing is taxed differently in certain states. For instance, in New York, if the clothing item is below a certain amount, it is not taxable, but if it's above that, it is. [unclear] are tax exempt in some states if they're prescription, but if they're not, they're taxable.

You don't need to memorize tax laws. Just categorize your products correctly in your tax engines so it applies the correct rate automatically. By understanding the where, who, and what of sales taxability, you avoid mistakes, charge your customers correctly, and stay compliant.

4:34 Business activity questionnaires

The third thing is what to do if you receive a business activity questionnaire. [unclear] a state asking about your sales tax? Don't ignore it.

These pre-audit questionnaires are being sent to businesses by states who suspect that those businesses should be collecting sales tax. States that are sending the most of these right now are Illinois, Washington, Maine, Massachusetts, Arizona, Wisconsin, and New York.

Make sure you take action. Read the questionnaires thoroughly. Some states are asking for three plus years of sales data. If you aren't past the threshold, make sure that you're responding with proof. If you have crossed the threshold but aren't yet registered, you may want to consider talking to a sales tax expert like the ones here at LedgerGurus. We can help you work through what will quickly become a sticky situation.

Just so you know, if you ignore a questionnaire, you can pretty much guarantee that you're going to be audited. So respond promptly and thoroughly.

5:27 Getting help if you've fallen behind

Now, how do you get some help if you've fallen behind? If you've missed registering in states or you have fallen behind in your sales tax payments, you need a plan in place before the states catch up with you.

[unclear] some of your options. You may want to get a nexus analysis so that you know exactly where you need to register. [unclear] consider doing a voluntary disclosure agreement. Many states reduce penalties and limit lookback periods [unclear] come forward voluntarily before they find you. [unclear] can save you thousands of dollars in penalties. It can reduce your lookback period from up to eight to 10 years down to maybe three to four. [unclear] risk of being audited.

Please note that once you've been contacted by a state, a VDA is no longer on the table, which is unfortunate. The point is, don't wait for the state to find you. Reach out to LedgerGurus, we can help. If you'd like more information on VDAs, we have a whole video about them. You can find that video here or by clicking on the link in the description below.

6:27 Full service compliance

And now if you're already being audited, don't go it alone. LedgerGurus can help, so reach out. We can help guide you through the process.

Lastly, we also do full service compliance. We can do your registrations, your filings, and provide ongoing support, so you can stay compliant without the headache and stress of trying to do it yourself.

Sales tax compliance is getting more complicated, but you don't have to handle it alone. If you need help with nexus, registrations or getting caught up, be sure to reach out to us at the link in the description below. We also have a lot of different resources for you. You can find all of them below.

If you found this video helpful, be sure to like it, subscribe, and ask any questions that you have in the comments. We'll be happy to get back with you. See you in the next one.