This article has been reviewed by tax expert Erica Gellerman, CPA.
Sales tax isn’t the most scintillating topic. In fact, most of us only think about sales tax in depth when we’re setting up our retail businesses or when something has gone wrong in the process.
When you get the stressful and unwelcome realization that you have a sales tax issue, you might feel like you’re completely alone in your troubles. That’s false, though. The truth is that millions of small businesses face similar sales tax issues every year. If you have a problem, someone else has probably also had that problem and figured out the solution.
Here are five of the most common sales tax issues you could run into as a small business owner—and what you should do if they happen.
Problem 1: You Have No Idea Which State’s Sales Tax You Should Be Charging
You have to determine if your business has a tax nexus in a state, which is just a fancy word for a state that has a connection to your business. Some factors in determining nexus states are:
- Physical locations: Locations of your offices, stores, warehouses, or factories
- Staff: Where your staff, employees, and management work
- Inventory: Where you store your goods
- Distribution: Where your goods are shipped from
As you can see, you might have just one nexus state if your business is fairly compact, like a single brick-and-mortar store. On the other hand, you could have several nexus states if your business is a bit more sprawling, like an online retailer.
Once you’ve confirmed your nexus states, contact the state’s sales tax assessing agency. (Hint: It’s usually called something along the lines of the Department of Revenue or Department of Taxation.) They’ll be able to give you the relevant rules about charging sales tax based on your business structure, current laws, and possible exemptions.
Problem 2: You’ve Realized That You Should Have Been Collecting Sales Tax but You Never Did
You’ve got three realistic options here. First, you can register with your state’s tax assessor, tell them what date you should have started collecting sales tax, and then pay your back taxes along with any fines, fees, or penalties.
The second option is to register from this date forward, calculate your back sales tax with a program like TaxJar, and then pay your back taxes along with your current taxes at your first filing date. You can use the information to negotiate a reduced tax bill with the help of a sales tax expert.
The third option is to register from this date forward, ignore the back taxes, and hope the state doesn’t do any sniffing around in your records.
The first two options are very similar but the difference in your bill may be significant. Obviously, the third option might land you in hot water and up to your neck in fines and penalties. (And if the state can prove that you knowingly didn’t collect or remit sales tax, it can get very serious.) Before you make your decision, it’s a good idea to consult with a sales tax expert so you can put your business on the right path.
Whatever you decide, just make sure you do it quickly because each day you’re making sales but not collecting the appropriate sales tax increases your risk.
Problem 3: You Don’t Know If You’re Collecting Sales Tax Correctly
Start by checking with your state tax authority to get a handle on what you should be collecting sales tax on and the percentage of each sale you should be collecting. The info should also be available on their website. If you still need some guidance, give them a call. You won’t be the first or the last person who needs a little extra guidance. If your business has a nexus in multiple states, figuring out how much to charge is a bit more complicated. An online shopping cart or point of sale (POS) software. All of the major ones have the sales tax information built into the system and you just have to make sure the settings are correct. You can find comprehensive guides to popular shopping carts and marketplaces here.
And if you’re still not quite sure if you’ve collected enough, check out TaxJar’s “Expected Sales Tax Due” report. We’ll compare how much sales tax you collected to how much sales tax you should have collected to help you determine if there’s an issue.
Problem 4: You Owe a Lot of Past Due Sales Tax
You need a Voluntary Disclosure Agreement (VDA). VDAs are legal agreements with a state that negotiate a modified look-back period for past due taxes and reduced penalties. The goal is to reduce your liabilities and your costs. In return, the state gets voluntary back taxes, without spending the money and resources it would cost to track down the debt and recoup it.
It’s a pretty simple process, but you’ll likely need a sales and local tax (SALT) expert to do it. They don’t come cheap but they are well worth the cost. The mistakes you could make doing it yourself could cost you a whole lot more.
The most important factor of VDAs is that they are proactive. In many cases, you can’t negotiate one if the state has already reached out to you about tax obligations. So if you’ve determined you owe a lot of past due sales tax, the sooner you get working on a VDA, the better.
Problem 5: You Can’t Find a Professional to Help You with Your Sales Tax Problems
If you’ve been seeking out a certified public accountant (CPA) to help you with your sales tax problems, you’ve probably been hitting a brick wall. Most CPAs don’t handle sales tax. Sales tax is a specialty in the accounting field sort of like neurology is a specialty in the medical field. What you’re looking for is a sales and local tax (SALT) expert.
The right SALT expert will know the state sales tax laws like the back of her hand. She’ll have experience working with the red tape and your problems won’t scare her in the least. Remember that most SALTs work in multiple states so it isn’t as necessary to have a SALT in your state as it might be to have a tax preparer located in your state.
But again, that kind of expertise doesn’t come cheap. Be prepared to get what you pay for in these situations.