Nothing ventured, nothing gained. No risk, no reward. These popular sayings often provide inspiration for pioneering small business owners. But, there are also times when it’s better to play it safe — especially when it comes to sales tax compliance. In this case, your best bet is to have proven practices in place that can help you navigate the complex tax compliance landscape and avoid speculative errors that could have more than a marginal impact on your profits.
When it comes to sales tax compliance, it’s better to play it safe.
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As you look to scale your business, here are seven smart business practices for keeping on top of transactional tax compliance.
1. Know Where You Have Nexus
Nexus means that a business must collect state sales tax if it has a substantial physical presence in a state. Recently, nexus laws have expanded to include distribution, independent agents, remote employees and affiliate networks. Be certain you understand where you are required to collect tax and keep up to date on nexus changes to protect against non-compliance penalties.
2. Keep Up with Product and Service Taxability Changes
Most sales of Tangible Personal Property (TPP) are subject to tax. This, however, now often includes intangibles, as many states routinely apply sales taxes to certain services. Keep apprised of product and service taxability as rules evolve and adjust your accounting systems and taxing practices accordingly.
3. Use the Right Tools to Get the Right Rates
It’s common for businesses to shortcut researching sales tax rates by using ZIP code tools. Unfortunately, taxing jurisdictions don’t always follow ZIP codes. Tax rates can vary even within an individual ZIP code and counties, while municipalities can levy sales taxes in addition to state rates. Geospatial mapping (the same technology as Google Maps), is more accurate and can calculate sales tax down to individual rooftops. Research geolocation tools online, such as Avalara’s free service.
4. Efficiently Manage Exempt Sales
Not all customers are required to pay sales tax. Depending on the rules in a taxing jurisdiction, certain businesses and individuals may be exempt. If you’re the seller, it is dependent on you to collect valid exemption certificates, keep them on file and track their expiration and renewal dates.
5. Know Where and How to Remit Sales Tax
When it comes to remitting sales tax, businesses must use correct forms and formats for each jurisdiction and meet filing deadlines. This can get complicated if you do business out of multiple retail or warehouse locations and must keep track of varying nexus requirements, exponentially upping the odds of missing a file date, rate change or certificate renewal date and increasing non-compliance and audit risk.
6. Be Audit Ready
The most critical action you can take to pass an audit is to collect sales tax properly over time and ensure that you have properly documented every step of the transaction. Audits are much less painful when transaction history, exemption certificates and other relevant information is readily available. If your practices, calculations and records are in good shape, you should be too.
7. Streamline Your Process
Time is of the essence for every business. The more time you spend calculating, collecting and remitting sales tax, the less time you have to spend on revenue-generating activities. Outsourcing and automation are efficient, cost-effective alternatives to manual processes. Look for a cloud provider that integrates with your accounting, point-of-sale, ERP or ecommerce system and offers a full suite of transactional tax services, including calculation, filing and handling of exemption certificates.
Of all the best practices outlined above, this last one — outsourcing tax compliance — provides you the greatest return on investment as it generally takes care of all the rest. You’ll spend less time worrying about sales tax and more time focused on your business.
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