Sales Tax Compliance: 8 Essential Tips to Protect Your Online Business

0:38 Review your nexus footprint

The first and most important one, and the one that everything else builds off of, is reviewing your nexus footprint. I cannot stress enough how important it is for you to know where you have nexus or where you will soon have nexus.

At LedgerGurus we do a lot of registrations for sales tax permits for our sales tax clients, and we are seeing that states are becoming increasingly aggressive. For example, in the state of Illinois their audit lookback period is all the way back to when their marketplace facilitator laws went into effect in 2018. In other states, they're requesting up to three years of sales histories to validate that the dates that our clients are saying that, hey, we passed the nexus threshold on this date, is accurate. So please do not wait to register after you've hit nexus thinking, hey, it's just going to go away, or I can fly under the radar. No, this can actually start causing serious problems for your business.

1:33

Now there's a couple of things I need to point out here. First, make sure that you are adding all of your sales from all of your sales channels into a particular state in order to determine nexus. For example, if you are selling on Amazon and on Shopify, and you've sold $75,000 into Arizona on Amazon and $35,000 into Arizona on Shopify, now you need to realize you have now passed the economic threshold. You are responsible for registering and setting up your Shopify channel to collect in the state of Arizona. You don't have to worry about Amazon, they're taking care of collecting, remitting, but you are responsible now for collecting on Shopify.

2:10

There's a couple of things that I need to make sure that you know. First, you are not responsible for sales tax before you have nexus in a state, whether that is by having physical property there or by passing the economic nexus threshold. Second, you must register before you can start collecting for a state.

2:28

That brings us to our third point. Do not set up your channels to collect in a state before you have nexus and you have registered. It is actually illegal to collect sales tax in a state where you have not registered for a permit. Illegal meaning criminal fraud. Don't do it. I know that some of you are getting notifications by Shopify saying, hey, you need to start collecting in this state. That's awesome, but you need to do it right. First of all, check your nexus. Make sure that you have passed the economic threshold or that you have physical presence in that state first. Next, register, then set up your channel to start collecting. You can use the date of your registration as the date to start collecting. Do not get this out of order, folks.

3:13

Now I have two resources to help you here. First is our free 10 Steps of Sales Tax guide. It's got a whole section in there about nexus, what determines nexus, all these different parts and pieces. So it's got a whole section, and then at the end there's a whole chart that goes state by state and tells you what those economic thresholds are. It's a great download and it's free. The link is in the description below. The other one is our sales tax masterclass called The Uncomplicated Truth about Sales Tax. We go into great detail about nexus and who is responsible, and just all this stuff about sales tax, as well as what to do after you have hit nexus. Again, the link is in the description below.

3:52 Voluntary disclosure agreements

Now if you did not register in a timely manner and you now have a sales tax liability to one or more states, you may be starting to get a little panicky. But before you freak out, let me tell you about voluntary disclosure agreements. These are programs offered by many state governments that allow businesses to come forward and report their unpaid sales tax.

Now you may be saying, why would I want to do that? So in return for disclosing these unpaid taxes, the states will often reduce the penalties and interest, as well as possibly even amnesty from criminal prosecution. These agreements typically require businesses to pay back the sales tax and interest for a certain time period, which is usually less than the time frame that an audit would cover. These programs are voluntary, meaning that the business needs to take the initiative to come forward and also to agree to the VDA terms. Now if you need help with this, LedgerGurus has a whole team of sales tax experts who can guide you through the process. We've got a link to our services page in the description below.

4:53 Product taxability and exemption certificates

The third thing is reviewing product taxability. The reason why this is important is because even if you've passed the nexus threshold, if your products aren't taxable you don't have to collect sales tax.

Now if you're just selling widgets, which are normal tangible personal property, then this probably doesn't affect you. But if you are in special categories like clothing or software as a service or foods and groceries or supplements, these laws may have changed. For instance, in Kansas there are laws being put into effect soon that will eliminate sales tax on food and groceries. In other states like New York, on clothing purchases below a certain amount, those aren't taxable. They're only taxable after they pass a certain amount.

It is important for you to know what laws affect your products in all the states that you have nexus or where you will soon have nexus. Believe me, it is better to be safe than sorry. And by the way, you probably want to be checking this at least yearly. If you are an Avalara user, they have a taxability matrix that they update monthly. If you are not, then we have a link in the description below to another taxability matrix.

5:58

The fourth thing is collecting exemption certificates. This is really, really important. You need to make sure that you have valid exemption certificates on file for any tax exempt customers. Examples would be governments, nonprofits, schools, but also you need to be paying attention to this if you're wholesaling.

Now we've got a lot of videos for sellers who are dropshipping from their suppliers and how they can get valid resale certificates and all of that, but the reverse is also true. If you are a supplier, you need to be getting valid exemption certificates from your sellers for any states where you have nexus. Be sure that you don't let these lapse. Make sure that you're paying attention to the expiration dates and you're staying in contact with your customers and getting valid documentation before that time runs out. It is super important to protect yourself, since you will be the one on the line for sales tax if you get audited.

6:48

As a rule of thumb, if there are any sales for which you do not collect sales tax, for instance maybe the customer is saying that they're buying to resell or they say that they're tax exempt, and by the way, I have a video right here about various kinds of tax exemptions, make sure that you always ask for a valid exemption certificate. Again, if you do not have that on hand and you are audited, you will be required to pay that sales tax out of pocket. So if they can't provide the documentation, feel free to charge them sales tax.

7:19 Use tax and retail delivery fees

Now the next thing is use tax. This is an area that is heavily audited for online sellers. So if you are doing product giveaways or promotional samples or donations of any sort, these are products that are being used but not sold. You need to report this as use tax on your state's return. Usually use tax is recorded on the same return as sales tax, and you only have to worry about it in your home state. I've linked one of our articles in the description below that goes into a lot more detail, as well as how to figure out how much tax you owe.

7:48

The sixth area is retail delivery fees. These are starting to become a thing. A retail delivery fee is a fee for any transaction that is delivered by a motor vehicle, though the details do vary by state. Incidentally, by calling it a fee, lawmakers are able to bypass the voting process while still generating more revenue. Kind of sneaky, huh?

Colorado was the first one to put theirs into place in July of 2022. It started at 27 cents per transaction but is going up to 29 cents per transaction in 2024. Other states are kind of liking this idea and they're starting to put theirs into effect. Minnesota's will go into effect in July of 2024. It'll be 50 cents per transaction that is greater than or equal to $100. Thankfully both states have small seller exemptions put into place now, because of the general hullabaloo that sellers made after Colorado put theirs into place.

By the way, New York and Illinois are also reviewing retail delivery fees in their state senates. Illinois is calling theirs a tax and it will be 0.5% of the retail selling price. New York's will be 25 cents per delivery into the state. We have an article on Colorado's retail delivery fee linked in the description below, and we will be adding more and more content as more states come online with this.

9:03 Aggressive states and sales tax holidays

Second to last is registering in aggressive states as you pass the thresholds. Now a lot of states are becoming more aggressive, but some are specifically aggressive towards online sellers. Again, this is tying back to knowing where you have nexus. I can't stress this enough, so please don't put your head in the sand and pretend this isn't an issue.

As of this video, the states that are really, really coming after online sellers are California, Texas, Wisconsin, Maine, Massachusetts, Florida, Illinois, Arizona, and Utah. They are doing things like partnering with Amazon to get its seller lists and figuring out where their sellers have inventory, questioning registration dates, and requesting several years of sales history like I mentioned before. They are buying seller lists, they're sharing those seller lists with other states, and many are increasing their auditing resources so they have more clout to go after online sellers. So don't mess around, just get registered where you have nexus. If you need help with that, please reach out to us. As I said before, LedgerGurus has a whole team of sales tax experts who can help you get compliant and have peace of mind.

10:06

The last thing we're going to talk about is sales tax holidays. This one is also very important. Now a sales tax holiday is a specified time frame in which customers are not required to pay sales tax on eligible purchases of what is normally taxable product. The flip side of that is, as a retailer, you are not permitted to collect sales tax on any eligible retail sale made online, in a store, by email, or any other means during that sales tax holiday.

Every sales tax holiday is different, but they usually have a theme. A common one is back to school sales tax holidays, but there's also sales tax free weekends for things like disaster preparedness supplies or hunting and ammunition or firearms or those kinds of things. As of right now, 22 states have a combined 45 sales tax holidays in 2024. I have a link in the description below for a list of all of these by state.

11:01 Getting help with sales tax

Now remember, you don't have to do all of this by yourself. We here at LedgerGurus are happy to help you. We have consultations available, we have monthly ongoing services, we have all different ways that we can help sellers with their online sales tax. The links are in the description below.

So if you liked this video, make sure that you like it, ask any questions that you have in the comments, and subscribe to our channel to see more videos like this. See you.