8 Common Mistakes to Avoid With Sales Tax

With over 13,000 tax jurisdictions in the United States, each with its own sales tax rates, rules, and regulations, even the most diligent business owners can find themselves overwhelmed by sales tax. And it’s only gotten more complicated in recent years, particularly following the landmark 2018 Supreme Court decision in South Dakota v. Wayfair, which changed the landscape of sales tax obligations for companies operating across state lines.

Sales tax errors can have costly consequences, ranging from substantial liabilities and interest charges to impacting your bottom line. This article, written by our partner Zamp, will examine the most common and costly mistakes businesses make and provide guidance on how to avoid them.

Many businesses incorrectly assume that they only need to collect sales tax in states where they have a physical presence. This misconception stems from older tax regulations that limited tax collection obligations to companies with tangible connections to the state.

However, the Supreme Court decision in South Dakota v. Wayfair changed everything for online sellers and companies, as states can require businesses to collect sales tax based on economic activity alone (economic nexus), even without a physical presence.

With economic nexus, most states have either a transaction or revenue threshold, or a combination of both. Once that threshold is reached, businesses must register for sales tax in that state to begin collecting and remitting.

Here’s an example of economic nexus thresholds:

Companies often don’t register for sales tax nexus after reaching a threshold or physical nexus in a new jurisdiction or state. That’s because they either don’t know they need to register or they procrastinate because they want to avoid the administrative burden of compliance.

But not registering can have serious consequences. Operating without a sales tax permit can result in penalties that exceed what would have been collected in sales tax. States view unregistered sales tax activity as a severe compliance failure, not a mere oversight.

One of the most common yet consequential errors in sales tax compliance is applying blanket taxability rules across all products, services, or jurisdictions. Product taxability varies dramatically by state and sometimes local jurisdiction. What qualifies as a taxable item in one state may be exempt in another.

Here’s an example of how product and service taxability can vary:

Accepting incomplete exemption certificates, failing to validate them, or not having them available during audits can be a significant misstep for your business. During an audit, missing or invalid exemption certificates can result in an auditor assessing tax, interest, and potential penalties on those transactions, even if the customer was legitimately exempt.

Here’s a look at the common exemption certificate types and their requirements:

Applying a single rule for taxing shipping charges across all jurisdictions can represent a costly oversight. States vary widely in their approach to taxing shipping and handling, creating a patchwork of regulations that defies simple categorization.

Failing to consider sales tax implications when making business decisions like expanding into new markets, introducing new products, changing business models, or implementing new systems can hurt your business and compliance. Companies that frequently make changes trigger new or modified sales tax obligations that, if unaddressed, can create significant compliance gaps.

Some business changes that could impact your sales tax obligations include:

Many businesses operating as or selling through online marketplaces, like Amazon or Etsy, misunderstand their tax collection responsibilities under marketplace facilitator laws. Nearly all states with sales tax have enacted marketplace facilitator laws that require the marketplace (rather than individual sellers) to collect and remit sales tax on the seller’s behalf. However, these laws contain numerous variations and exceptions.

Here are key marketplace facilitator considerations:

Many businesses rely on manual processes or basic accounting software for sales tax compliance, underestimating the return on investment that sales tax compliance solutions can provide.

The truth is that modern sales tax compliance has become increasingly complex, with thousands of jurisdictions, frequent rate and rule changes, and increasing audit scrutiny. Manual approaches are not only inefficient but can be increasingly risky.

Navigating the complex world of sales tax compliance and obligations requires knowledge, vigilance, and robust tax solutions to avoid the common pitfalls outlined in this article. From misunderstanding nexus requirements to overlooking rate changes and managing exemption certificates, these mistakes can lead to significant financial consequences.

That’s where Zamp comes in, offering exceptional value as a managed solution. They combine intelligent software with expert service to handle your sales tax compliance completely. Contact their team today if you’re ready to take the leap and have sales tax taken off your plate.

Sales tax compliance is crucial and complex, and it’s just one aspect of running a successful ecommerce business. Blayzer specializes in providing data-driven ecommerce solutions to help businesses scale. Our services include custom design, development, and digital marketing to optimize your online presence and drive growth. Learn more about our Services and Solutions.