Five sales tax mistakes online sellers & their accountants make
by December 14, 2023
This guest post was written by Michael J. Fleming, Director of Partner Relations at Peisner Johnson & Company, LLP. Please note: This blog was originally published in 2019. It’s since been updated for accuracy and comprehensiveness.
At TaxJar we spend a lot of time talking to financial professionals in order to help our customers be informed when it comes to sales tax. Of course, it’s easy to make a mistake with such a complex topic. So we consulted Michael J. Fleming of Peisner Johnson & Company and he gave us the following scenarios when an e-commerce seller (or their accountant) might make big sales tax mistakes.
1. Failure to register and collect sales tax when necessary. – In order to be responsible for sales tax in a state, you must have a connection with that state. This link is called nexus.
Sales tax nexus occurs when your business has some kind of connection to a state. All states have a slightly different definition of nexus, but most of the time states consider that a “physical presence” or “economic connection” creates nexus. You only have to charge sales tax in the states in which you have sales tax nexus.
Business activities that create sales tax nexus include:
- Having an office, store or other location in a state (even a home office)
- Having an employee, salesperson, contractor, etc. in a state
- Owning a warehouse or storage facility in a state
- Storing inventory in a state (such as in an Amazon FBA warehouses or other 3rd party fulfillment center)
- Having a 3rd party affiliate in a state
- Temporarily doing physical business in a state for a limited amount of time, such as at a trade show or craft fair
Economic nexus – Making a certain amount of sales in a state (either a certain dollar amount or a certain number of transactions)
If you suspect you might have sales tax nexus in a state, you could check with that state’s taxing authority to determine whether or not you have sales tax nexus and are required to pay sales tax in that state.
2. Registering and collecting tax when not necessary. – Now, on the flip side, sometimes companies go too far the other way. That is they register to collect taxes where not necessary. If you have small amounts of sales in a given state, you might not have met a nexus threshold and therefore are not required to collect sales tax in that state.
3. Failure to utilize resale certificates. – When purchasing goods for sale either directly or with a drop shipper, you do not have to pay tax, if you provide a valid resale certificate. The rules for what constitutes a valid certificate vary, but you can increase your margins by knowing and following the rules.
4. Collecting and not remitting tax. – This is the cardinal sin of the sales tax world and state revenue officers take a very dim view of it. Virtually all states can impose criminal penalties if the dollar amounts are large enough.
5. Collecting and remitting to the wrong state. – Many companies feel that they have their bases covered if they collect tax on all their sales and then pay it to their home state. This is not a good option either, as the state where the tax was legally due may view this as a “tax-collected-not-remitted” (remember the cardinal sin above?) situation. At the very least they will want their tax, penalty and interest and leave it up to you to get the money back from your home state.
How TaxJar can help manage your compliance
These are just a few common mistakes online sellers make when it comes to managing their compliance. Avoiding these missteps while managing a growing business is challenging. Luckily, TaxJar can help. TaxJar’s sales tax software manages all aspects of your compliance, from registering for a permit, to calculating, collecting, and remitting sales tax. Start a free, 30-day TaxJar trial today, and see how TaxJar can help keep your business compliant.
