Sales tax compliance can be a complex and daunting process for businesses, particularly for those operating in multiple states or engaging in e-commerce. Each state has its own rules, rates, and regulations, and failing to comply can result in costly penalties, interest charges, and even audits. Despite the best efforts of business owners and accounting professionals, mistakes in sales tax compliance are still common.
This blog discusses some of the most frequent mistakes businesses make when it comes to sales tax compliance and how you can avoid them. Whether you’re a small business or a large corporation, understanding these common pitfalls—and working with experienced tax professionals like PEAK Business Consultancy Services (PEAK BCS)—can help ensure you remain compliant and avoid costly errors. Learn more about our services here.
1. Failing to Register for Sales Tax in All Applicable States
One of the most common mistakes businesses make is failing to register for sales tax in states where they are required to do so. This is particularly relevant for businesses that operate in multiple states or sell online. In 2018, the U.S. Supreme Court ruling in South Dakota v. Wayfair allowed states to impose sales tax on remote sellers based on economic nexus. If your business meets certain thresholds (e.g., over $100,000 in sales or 200 transactions in a state), you are required to collect and remit sales tax in that state, even if you don’t have a physical presence there.
How to Avoid This Mistake: Ensure that your business registers for sales tax in every state where you have a tax obligation. This may include states where you do business in person, as well as states where your sales exceed the economic nexus threshold. Automated tools and platforms like Avalara and TaxJar can help track your nexus and ensure you remain compliant.
2. Charging the Wrong Sales Tax Rate
Sales tax rates vary not only by state but also by city, county, and even district. Charging the incorrect sales tax rate is a common mistake businesses make, especially if they are not using tax automation software or have multiple locations. Additionally, some products and services are taxed at different rates, and failing to apply the correct rate can result in overpayment or underpayment of taxes.
How to Avoid This Mistake: Make sure you are using the correct rate for your sales. Many cloud-based accounting systems integrate with sales tax tools to automatically calculate the correct rate based on the buyer’s location. This helps ensure you’re collecting the right amount of sales tax on every transaction.
3. Not Tracking Exempt Sales Correctly
Certain sales are exempt from sales tax, such as sales for resale, sales to nonprofit organizations, and sales of certain goods (e.g., groceries or prescription medications). However, businesses often fail to track exempt sales properly or don’t collect the required documentation, such as exemption certificates, to substantiate the exemptions. This can lead to audits and penalties.
How to Avoid This Mistake: Be diligent in collecting and retaining valid exemption certificates for exempt sales. Use a system to track these exemptions and ensure that they are clearly recorded. Consider implementing an internal process or automation tools to help manage and verify exemption claims. Additionally, be aware of the specific exemptions in each state, as they may vary.
4. Failing to File Sales Tax Returns on Time
Missing sales tax return deadlines is another common mistake that can result in significant penalties and interest charges. Many businesses fail to file returns on time or forget to file entirely, especially if they have a complex sales tax situation or are required to file in multiple states. Penalties for late filing can add up quickly, making it important to stay on top of deadlines.
How to Avoid This Mistake: Set up a calendar or reminder system to track sales tax filing due dates. If your business operates in multiple states, consider using a centralized system or software to track and manage deadlines. Working with tax professionals or outsourcing your sales tax compliance to experts can also ensure that returns are filed accurately and on time.
5. Not Keeping Detailed Records
Maintaining accurate and detailed records of sales transactions, tax collected, and exempt sales is critical for sales tax compliance. Without these records, it can be difficult to respond to an IRS audit or reconcile your sales tax filings. Many businesses fail to keep proper documentation or fail to store it for the required retention period.
How to Avoid This Mistake: Implement a robust record-keeping system that tracks all sales, sales tax collected, exemptions, and payments made. These records should be easily accessible and organized, especially in the event of an audit. Cloud accounting and sales tax software can help businesses maintain digital records and streamline the process.
6. Overlooking Sales Tax on Services
Many businesses mistakenly assume that sales tax only applies to the sale of tangible goods, overlooking services that may be taxable in certain states. In many states, services such as consulting, professional services, repairs, and digital products are subject to sales tax. Failing to collect sales tax on these services can result in underreporting and penalties.
How to Avoid This Mistake: Understand the sales tax laws for services in the states where you operate. Some states apply sales tax to a broad range of services, while others only tax specific services. Stay updated on changes in sales tax regulations, as states often modify their taxability rules.
7. Ignoring Sales Tax for Online Transactions
As e-commerce continues to grow, so does the complexity of sales tax compliance for online transactions. Many online businesses fail to account for sales tax on sales made to customers in other states or countries. With the introduction of economic nexus laws following the South Dakota v. Wayfair decision, remote sellers are now required to collect sales tax in states where they exceed certain thresholds, even if they do not have a physical presence in that state.
How to Avoid This Mistake: Ensure that your e-commerce platform or online store is set up to collect the appropriate sales tax based on the buyer’s location. Use sales tax automation tools to help you manage compliance in different states. It’s also important to review your sales regularly to ensure you are meeting nexus thresholds and collecting the right amount of tax.
How PEAK Business Consultancy Services Can Help
PEAK Business Consultancy Services, based in India, specializes in providing comprehensive tax compliance support to U.S.-based CPA firms and businesses. Our team is well-versed in the complexities of U.S. sales tax regulations, including multi-state compliance, economic nexus laws, and the taxation of services and digital products.
We help businesses navigate the complex landscape of sales tax compliance, offering services such as sales tax filing, exemption certificate management, tax rate determination, and timely filing reminders. Whether you’re an e-commerce business, a multinational corporation, or a service provider, PEAK BCS has the expertise to ensure that you remain compliant and avoid costly mistakes.
Click here to explore how PEAK BCS can support your sales tax compliance needs.
Conclusion
Sales tax compliance can be challenging, especially with the ever-changing rules and regulations across states. From registering in all applicable states to correctly reporting income and exemptions, businesses face numerous hurdles. However, by staying informed, using the right tools, and working with experienced tax professionals, businesses can avoid these common mistakes and ensure compliance.
PEAK Business Consultancy Services is here to help you navigate the complexities of sales tax compliance and avoid the pitfalls that can lead to penalties and audits. Let our team handle your sales tax filings and ensure your business stays compliant and tax-efficient.
To learn more about how we can assist with your sales tax needs, visit www.peakbcs.com.
