Sales Tax Compliance? As You Grow Don’t Ignore It.Ramon Ray
Over the past year, life as we know it became undoubtedly intertwined with the internet. Almost everything happened online – work, school, gatherings, shopping, and more. The sudden shift to ecommerce created new opportunities for businesses to reach more customers across more channels. At the same time, we’ve seen the rise of blended shopping experiences for consumers like buy online, pick up in store and social selling as consumers demand convenient, yet seamless, multi-channel experiences.
While the emergence of omnichannel shopping has created opportunities for businesses, those who have capitalized on the shift and emerged as the early winners, have been those who have addressed the associated challenges early on. Supply chain constraints and technology infrastructure limitations are among some of the top challenges businesses face when selling across multiple channels as they work to update their operations to keep pace. And yet, as businesses look to grow by expanding their sales channels, growing tax obligations perhaps pose some of the most significant risks to growth.
Understanding how tax changes as your business grows
As a business expands sales channels, the customer base inherently becomes more geographically dispersed, which has an impact on nexus – the connection to a state or local jurisdiction that obligates a business to collect and remit sales tax. In June 2018, a landmark decision by the United States Supreme Court in South Dakota v. Wayfair, Inc. gave states the right to enforce economic nexus, requiring remote sellers to collect and remit sales tax if sales into the state exceed certain sales volume or revenue thresholds. Today, all but one of the 45 states with sales tax have economic nexus laws in effect.
With these new rules, it can easily become incredibly complex for a business of any size to keep track of new tax obligations, as well as constantly changing tax rules and rates. Even further, the channels through which a business sells to customers has additional impacts on tax obligations. For example, marketplaces are responsible for collecting and paying sales tax on behalf of the sellers that use their platforms. However, if a business sells through a marketplace and on their own ecommerce website, the sales made through the marketplace contribute to their overall nexus revenue.
Addressing each step in the tax compliance process to minimize risk
As a business grows, there are a series of steps that they will usually have to follow to get and remain tax compliant. While not all steps will apply to every business, understanding all of the requirements is important as channels expand and potentially create new obligations. The steps include:
- Know where your business must collect and pay sales tax – Understand legislative changes, how each state’s nexus laws impact your business, and who is responsible for collecting tax.
- Register to collect and pay sales tax – Register with state and local tax authorities where you meet or exceed nexus thresholds.
- Calculate the correct amount of sales tax – Ensure every system used to process transactions accurately calculates sales tax for the appropriate jurisdiction.
- Track and manage exempt sales – Where applicable, collect and validate exemption certificates from buyers.
- Pay the sales tax to the tax authority – Collect data from across your business systems to prepare returns and file returns on time according to each jurisdiction’s schedule.
Automating sales tax to reduce complexity and streamline operations
While businesses can navigate each of the above steps on their own, manual compliance is often time, resource, and monetarily expensive. Because sales tax laws and nexus requirements change frequently, automated solutions can help businesses keep track of the correct rates and rules they must comply with. Similarly, because omnichannel businesses usually expand quickly, automating tax creates a foundation for seamless growth without putting the business at risk of an audit.
For a business that is seeking to grow and do so quickly with as little risk as possible, managing tax compliance correctly from the beginning is essential. If a business begins to grow without addressing tax compliance, it’s likely that they will face audits that could lead to costly penalties. Perhaps even worse, getting tax incorrect at checkout can also impact the customer experience if costs are too high.
Growing a business can be demanding. Owners must be able to meet their customers’ expectations, learn new channels, drive efficiencies, and support their employees – leaving little time to spend on tax compliance. With the help of technology and trusted consultants, businesses can create a strong foundation of compliance to easily stand-up new channels and operations with little tax headache. This enables leaders to focus on the other facets of their business that will help them reach their goals and expand their business.
Megan Higgins is vice president and general manager of ecommerce and marketplaces at Avalara. In her role, she leads the business development team for Avalara’s global ecommerce and online marketplace business.