How to Avoid Sales Tax Overpayments
Following the Supreme Court’s decision in the Wayfair case, online retailers were left wondering how exactly the next year would play out. How many more states would implement new Economic Nexus laws, and how would they go about collecting and remitting sales tax to those states to stay compliant?
A big part of that is calculating and remitting the correct amount of sales tax for sales. With dozens of states now implementing these laws and different tax rates in each state (and many municipalities), it’s more difficult than ever for a small online retailer to keep track of and pay sales tax. There’s a recurring risk that they overpay. To help, here are some best practice tips to keep yourself in compliance without overpaying.
Understanding Relevant Sales Tax Exemptions
Sales tax exemptions follow similar patterns across different states but do vary in significant ways. For this reason, it’s important to have a process in place for understanding and evaluating exemptions at a high level.
Companies should understand what these exemptions entail, provide the proper exemption certificates to suppliers, and always maintain clear records in case of an audit in the future. The risk for these audits will only increase as more of these laws go into place and states get serious about reclaiming the tax base, they feel they’ve lost to online commerce.
Reviewing Your Current Processes for Collecting Sales and Use Tax
To avoid the temptation to "just charge tax" for something rather than worry about whether it is exempt or in a state that requires collection, the following steps should be considered:
- Evaluating Nexus – Where do you currently sell products and through which channels? Prepare a detailed list of where you are required to collect sales tax and through which online sites (as some may do it on your behalf through marketplace facilitator laws).
- Filing Requirements – Within those states and municipalities where you do have to collect sales tax, what are the specific filing requirements. Every state is different in this regard, with different thresholds determining annual, quarterly, or monthly filing deadlines.
- Registration Processes – At the same time, there will be different requirements for how and when you register to collect sales tax. In some cases, even if you don’t collect sales tax but someone does on your behalf (e.g. Amazon or eBay), you may be required to acquire and maintain a current sales tax certificate and may even need to file a zero return each year.
- Exemptions – If you have exemptions, you should have issues certificates from all states in which they are needed on file and ready to provide to the appropriate suppliers for specific transactions.
In addition to the above related to how you interact with state revenue agencies, your internal processes should match up. That means a detailed audit of your invoice processes and accounts payable systems to ensure they can properly integrate with and support your new sales tax obligations. Software can be a beneficial resource for this, as can a third-party audit to ensure compliance with all relevant regulations.
Working with Experts to Support Your Efforts
Even if you are confident in your company’s accounting capabilities and have good legal counsel on your side, it’s recommended that you consider a third party to help ensure compliance and better prepare for and hopefully avoid future audits related to Wayfair.
The goal is to ensure you are on-time and accurate with all sales tax reporting and your internal records and invoices, but also that you operate as efficiently and profitably as possible. More states will implement laws in the coming months and new efforts to consolidate and work together to improve these processes will be introduced, both at the state level and federally. Your best option to stay ahead of these changes is to spend time reviewing and updating your systems regularly, with the right software and professional support at your side.