5 tips on how to avoid penalties on Sales tax and Use tax
With the onset of digital commerce, it is not unusual for you as a small business owner to consider doing business outside your own state boundaries. While that is something attractive from a growth perspective, you may unknowingly fall into unchartered waters when it comes to Sales and Use tax unless you are careful.
For starters, do you know that there are more than 12000 tax jurisdictions in the country and each has its own unique requirements and exemptions? More often than not your impression of what is required may be way off the mark. On top of that, what words you describe to explain the work you do may have totally different interpretations in different jurisdictions and accordingly different rates of tax.
Calling a state body with a tax question may create other issues. You may be opening the door for audit or may be liable for doing what they told you on the phone as the advice given may not be accurate.
Here are 5 tips to keep in mind if you want to stay out of trouble:
1. Understand the difference between Sales Tax and Use tax and pay accordingly - Use taxes compensate for any missing sales taxes generally in cases of the storage, use, or other consumption of goods in a state, tax withdrawals for use from previously untaxed stock, and to prevent discriminatory taxation based on where and how purchases are made . Unlike sales taxes, which are generally remitted by sellers, use taxes are generally remitted by the buyer .
2. Know what tax code applies in your case - Because of the complexity and variability of tax regulations and different interpretations, consider investing in the following publication - CCH Tax Law Editors U.S. Master Sales and Use Tax Guide which is updated regularly and provides exact information.
3. Find out if there is a Nexus and if you are required to collect tax outside your state - Nexus is established if you are an out-of-state seller and your activities in a state become substantial, frequent, or continuous. In that case, you will be considered to be “engaged in business” in the state and be required to register with the state, and to collect, report, and remit applicable taxes. Some indicators of nexus may be - Ownership of property in a state
maintaining, occupying, or using a place of business in a state, such as an office, branch, sales or sample room, warehouse, storage facility, or distribution house, having employees or agents in a state, advertising, canvassing, hawking, peddling or soliciting in a state, delivering by other than a common carrier or mail. You may review the important case https://www.aicpa.org/advocacy/state/south-dakota-v-wayfair.html that had a huge impact on these decisions.
4. Registration and Compliance - Find out the requirements to obtain a license before conducting business in the state. Some states may require a bond or other form of surety, or deposits, prepayments, or estimates from larger sellers.
Returns must generally be filed by the due date, even if no tax is due in each state. Late-filing penalties can usually be assessed if returns are filed late. These vary from as little as 2% up to 50% plus additional interest. Late-payment penalties vary from as little as one-half of 1 percent up to 25 %. You may also lose your license to do business in the state.
5. Language used in the invoice - Different jurisdictions use different terminologies to assess tax. As an example - the words "Installation" and "Repair" may have totally different tax liabilities depending upon where you are filing. So do your research by jurisdiction by referring to the Tax code and be very specific in your invoice when it comes to presenting each line item in terms of the work as well as the tax status - "collected or exempt". You may be assessed tax on the entire invoice if you do not.
6. Work with an expert - Always work with an expert. Given the nature of complexity and the possibility of hefty fines, penalties and license revocation, it is important to engage the right tax lawyers and accountants in ensuring that you are always compliant. At Booksplustax Associates Inc. (https://www.booksplus.tax) we have Attorneys, CPAs, Bookkeepers all under one roof to ensure that you are doing everything right.
Contact us at firstname.lastname@example.org for a free consultation.