If you’re selling a product or service to customers based in the U.S., you’ll likely be responsible for collecting and remitting state and other local sales taxes.
Failure to comply with local tax laws and regulations could result in hefty financial liabilities, penalties, and long-term damage to your business’s reputation.
So, understanding the ins and outs of sales tax is important for any business owner or growing company. In this article, we’ll cover some important compliance considerations to remember.
What are the sales tax rules for businesses?
Sales taxes are taxes imposed by state and local governments on the sale of goods and services. Businesses that meet certain criteria must collect the appropriate sales tax amounts from customers and remit those funds to the appropriate authorities.
Here are some important things to keep in mind:
Nexus requirements
A business may be required to collect sales tax in a state (or a local jurisdiction like a city or county) if it has nexus there—in other words, if it has a physical presence there, such as an office or employees, or if it has reached a predefined economic threshold there, such as a revenue amount or a number of sales in a calendar year.
Determining nexus is the first step in understanding whether you are liable for sales tax in a given location.
Taxable goods and services
Not all goods or services are taxable, and businesses must understand which products they sell fall under these regulations. For example, in California, digital goods are generally not taxable, while in Washington, they are.
Or, for example, dietary supplements are exempt in Connecticut but taxed at a reduced rate in Illinois.
In some cases, your customers may be tax-exempt if, for example, they present a valid resale certificate at the time of purchase.
Use tax
If sales tax isn’t collected during a purchase, the buyer may owe use tax. Businesses, too, must ensure that use tax is paid on purchases where applicable.
Compliance
Failure to comply with these regulations can cause issues. Below are some of the common pitfalls that lead to non-compliance:
- Not registering on time once the nexus is established.
- Failing to collect sales tax.
- Charging the wrong rate.
- Not filing on time.
- Not remitting sales tax by the due date.
Penalties for noncompliance with sales tax regulations
Failing to properly collect and remit sales taxes can have both immediate and longer-term consequences.
Immediate consequences
Failure to collect sales tax can result in fees and fines, and a requirement to pay those amounts (in addition to paying previously unremitted sales tax amounts) can have an immediate impact on a business’s bottom line. In most cases, failing to pay penalty fees adds more penalty fees over time.
And in some cases, "responsible persons" (e.g., owners, officers, financial decision-makers) could be held personally liable for balances owed, even through bankruptcy proceedings, as sales tax is considered a trust fund tax.
Another immediate risk is the suspension or revocation of sales tax permits, which can halt business operations in an area until compliance is restored. The financial strain caused by penalties, interest, and legal fees can severely impact a business’s cash flow and stability.
Longer-term consequences
Failing to collect sales tax can increase a business’s risk of a tax audit, and even if a business owner pays all the required back taxes, fees, and fines, and becomes compliant, previous noncompliance can mean that tax authorities keep a closer eye on the business and subject it to more frequent audits in the future.
Reputational risk is another possible downside. For example, the California Department of Tax and Fee Administration publishes a list of the top 500 sales and use tax delinquencies.
Legal consequences for failing to remit sales tax
Failing to remit collected sales tax can lead to severe legal consequences. In extreme cases, it may be classified as tax fraud, particularly if a business knowingly collects tax from customers and fails to remit it to the appropriate tax authorities.
This can result in substantial fines, criminal charges, and even jail time for business owners. Tax authorities may also take aggressive action, such as placing liens on property, garnishing funds from business accounts, or seizing assets to recover the owed taxes.
Operational impact
The operational consequences of noncompliance can be just as damaging as the financial penalties.
Businesses undergoing audits must often funnel resources into administrative tasks related to their tax mishaps, diverting staff from their regular responsibilities and disrupting the business and its ability to serve customers effectively. Legal fees that arise from dealing with noncompliance can reach tens of thousands of dollars or more.
How states enforce sales tax compliance
States are increasingly proactive in tracking down noncompliant businesses, using tools and strategies such as these:
In addition, governments are always coming up with new and innovative ways to make sure that all businesses follow tax laws.
If you believe you are already non-compliant, you may need to backfile previous sales tax returns. You could also explore voluntary disclosure agreements (VDA) and sales tax amnesty programs.
Avoiding sales tax compliance issues
Being proactive with sales tax can save you a world of headaches. Some basic steps to keep in mind are as follows:
- Know your nexus: Regularly review your business activities to determine where you have sales tax obligations.
- Register for permits: Apply for sales tax permits in all relevant states as soon as you establish nexus.
- Use tax automation tools: Leverage software to streamline tracking, collection, and remittance processes.
- Stay informed: Sales tax laws, rules, and regulations change frequently; it’s up to businesses to be aware of changes that impact them.
Tools and resources for sales tax management
Sales tax compliance is much easier with the right tools and resources. The two most important ones are:
Tax software
Sales tax gets complex fast. And businesses of all sizes may benefit from implementing sales tax software.
Products like Numeral provide automated tools for tracking multi-state obligations and ensuring accurate remittance. Tools like Numeral can offer:
- Automated tax compliance.
- Multi-state tax management.
- Real-time reporting.
- Seamless integration.
- Expert support.
While Numeral supports over 1,300 businesses today and is highly rated, it isn’t the only provider available. Business owners will often compare solutions like TaxJar and Avalara. There are also purpose-built solutions for accountants, e-commerce brands, and even software companies.
Tax professionals
In many cases, software will suffice, but a tax professional may be needed for more complex situations, especially those involving multiple states and locations. Consider speaking to a CPA or another registered tax professional to make sure that sales tax is both collected and remitted correctly.
A CPA could also assist in preparing VDAs and applications for amnesty programs.
Final thoughts
Failing to properly collect and remit sales tax can put your business at risk. And the last thing that most growing companies want to worry about is unpaid liabilities, penalties, fees, and audits.
One of the best ways to manage sales tax is to use technology solutions to navigate the maze of state laws and regulations.
Final word: Collect the right sales tax amount from your customers and remit it on time.
