Navigating the Labyrinth of Sales Tax Compliance

Preface: Millions and millions of people don’t pay an income tax, because they don’t earn enough to pay on one, but you pay a land tax whether it ever did or ever will earn you a penny. You should pay on things that you buy outside of bare necessities. I think this sales tax is the best tax we have had in years. –Will Rogers

Navigating the Labyrinth of Sales Tax Compliance

Credit: Matthew P. Glick

So, you’re a small business owner, or you’re thinking of becoming one in the near future. You’ve taken the plunge, and you’re starting to see the return on your investment. But now, you just started researching sales tax (Or just started reading this article), and all of the sudden, your head is spinning a million details, and you’re just trying to figure out where you’re supposed to start. Sales tax is intimidating, and it can be difficult to know where to start. First of all, there are fifty states in the US (not to mention five additional territories), each with the power to levy a tax on the sale of items in that state/territory. Compounding the issue, is that each county and city can also impose an additional tax on sales that happen within the county/city. In all, that brings the total number of sales tax jurisdictions in the US to well over 10,000. To further complicate matters, each jurisdiction can have its own rules on what is considered taxable, and can also set its own tax rate. Is your head spinning yet?

While sales tax compliance is a very tedious process, I hope this article will help you understand where your business stands in this area, and give you a good starting point to do some additional research. If in doubt, you will want to pull in the advice of a qualified CPA or tax attorney to help you through the process.

Some of you may be thinking “Yeah, that’s a lot of stuff to keep track of if you’re managing a large enterprise like Walmart, but how does this apply to me?” Excellent question, the reasoning is simple: I don’t have a presence in any of these other jurisdictions, so why do I need to worry about their laws?

This reasoning was true once upon a time, until 2018, when the United States Supreme Court ruled in South Dakota v. Wayfair, Inc. that a physical presence was not necessary in a state to give that state the power to tax sales into that state. This overturned the decision also made by the Supreme Court in Quill Corp. v. North Dakota, which ruled that a physical presence was necessary in order for the state to levy a tax on the sale.

So what happened that caused the Supreme Court to overturn its prior decision? The most obvious factor is changes due to technological advances. To put this in perspective, the Quill decision was based on the presence of floppy discs being shipped into the state.

The Supreme Court ruled that a shipment of floppy discs did not constitute a physical presence in the state. Since then, with the advent of the internet, ecommerce is a booming industry, and thanks to solutions such as Shopify and Americommerce, it is now available to small and large businesses alike. Previously, states had to levy a tax on the use (Use tax) of items within their state to recoup lost sales tax dollars due to online sales, which would be the buyer’s responsibility to pay to the state, rather than the seller’s. As buyer’s compliance with use tax reporting is astronomically low, South Dakota sought to pass a law that would overturn the physical presence rule for collecting sales tax, and did so successfully.

So, we just established that if you are a small business, and your sell items or services out of state, you may need to comply with over 10,000 individual laws. Now what? The answer will vary depending on the way your business is structured, and how you market your products or services. The first thing to consider is the volume of out-of-state sales that you deal with. If your gross receipts for sales within a certain state are under $100,000 and less than 100 transactions, chances are low that additional research is required.

Keep in mind that each state measures sales differently. Some use gross receipts, others use net sales; some measure it over the calendar year, and others measure it on a continuous basis over the past twelve months, but a quick look at gross receipts should be good indicator if more research is required.

Then of course you need to research the products and services you offer, and find out if those items or services are taxable. Again, each jurisdiction has different rules regarding what is taxable. As a general rule of thumb, tangible personal property is taxed, and necessary items such as food and medication are exempt.

Again be sure to verify, as each state has different nuances to their exemptions, but this rule of thumb can help you understand what to expect. Services are much more tricky, as some states tend to tax services, while others do not.

The good news is that most online ecommerce platforms are equipped to handle these challenges by integrating with services that will automate sales tax compliance for a fee. These services may calculate sales tax, and allow you to file it on your own, or may even file the appropriate returns for you, depending on the level of service you subscribe to. Searching “Sales tax compliance software” into a search engine should help you locate a provider.

If you only offer your products from a brick-and-mortar location, and only do local deliveries if any, your job is even easier. Simply research to verify your state’s sales tax rate, and confirm to make sure your county and city don’t also levy a sales tax. You can take advantage of this free tool by Avalara to look up sales tax rates by typing in the address.

If this seems like a lot, it’s because it is. The good news is that there is software out there to help you stay compliant, and these solutions tend to scale with your company, making the investment palatable even in the beginning stages of your company. While it’s not a perfect solution, it is better than no solution, and noncompliance can be costly, as back taxes, along with penalties and interest can stack up quickly.

Our team at Sauder & Stoltzfus is willing to help. Get in touch with us to see how we may be able to assist you in becoming or staying compliant with sales tax regulations.

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