By: Carla Yrjanson
Complying with sales and use tax regulations across jurisdictions can be a challenge for small businesses in a normal year––and 2020 was anything but normal. Retailers leaned heavily on e-commerce in response to COVID-19, creating new opportunities for many companies. But with this comes increased complexities in regard to tax compliance.
There are about 11,000 different jurisdictions in the U.S. alone, resulting in thousands of unique taxability rules that businesses must understand, collect, and remit to the government. Now, as states consider increasing taxes to counteract financial losses incurred due to the pandemic, states are likely to impose more changes, as well as audit business operations with a fine-toothed comb. SMBs must be more diligent than ever to ensure compliance across state lines.
Challenges Facing SMBs
- Complying at the onset. Too often, businesses aren’t in-the-know regarding the taxability of their products. For example, the taxability of everything from digital services to flavored vape are among ongoing conversations in the tax space. Retailers must understand the nuances of potential tax regulations to stay in compliance with state and local laws and regulations.
- Keeping up with changes. There is a significant lack of guidance for entrepreneurs around changes to tax laws and jurisdictions, and it can be challenging to educate oneself. Coupled with the fact that tax rules are ever evolving, it’s critical for businesses to be educated in order to remain compliant without missing a beat.
- Varying state and local jurisdictions. Tax rules are complicated enough as they vary state to state, but cities, counties, and districts often have their own tax rules that must be applied – not to mention international requirements. Understanding and following rules within rules can become a huge burden to businesses selling across several jurisdictions.
- Accountants can’t catch it all. It’s an ongoing process that must consider every single transaction conducted by a business, as well as individual customers. Businesses need to juggle the intricacies of taxability of products, taxability of the customer, where products or services are going, and the tax rates of that jurisdiction. Anything done incorrectly must be remedied with the tax jurisdiction.
Best Practices for SMBs to Get it Right
- Stay on top of nexus thresholds. As a result of South Dakota vs. Wayfair, online merchants are responsible for keeping track of regulations within thousands of jurisdictions across the U.S, meaning they must keep a finger on the pulse of the economic nexus used to determine when a business must register and collect state and local taxes. Small businesses must look at nexus requirements and actively make determinations to register and collect that tax as a remote seller. It’s crucial to stay on top of changing requirements as they happen (i.e., before states come calling to notify you that a mistake was made!).
- Keep an eye on use tax. Tax on items purchased for a businesses’ own use is often examined during an audit. Business owners must ensure they are accounting for their own purchases and paying the appropriate sales and use tax on those assets and consumables, as this is often an area underreported and assessed in audits.
- Automate to ensure compliance. For small businesses selling within a few local jurisdictions, collecting and remitting taxes may be possible to handle manually. However, for businesses with multiple locations or selling online, it becomes nearly impossible to manage without making mistakes––and mistakes can be costly. Automated systems help small businesses calculate tax correctly at the time of invoicing, ensuring the accuracy and efficiency needed to get the job done correctly.
Calculating sales tax is always complicated, but for small businesses working against ever-changing regulations, atop an ongoing pandemic, there are steps that should be taken to mitigate risk and make calculations less of a burden. Staying up to date on tax rules, keeping careful documentation, and automating where possible can ease tax-related strain and ensure compliance along the way.
Carla Yrjanson, VP of Indirect Tax Content at Thomson Reuters: https://tax.thomsonreuters.com/en/corporation-solutions/indirect-tax