It's easy to get tripped up remitting money to a state. It will happen whether your e-commerce business files taxes monthly or quarterly. This article deals with some of the common errors businesses make when filing sales tax returns. This helps you identify and evade some of the pitfalls here. Read on how can you evade these common mistakes. Let's explore it.
Factors Affecting Sales Tax in Different States
Some factors affect sales tax in different states. It involves:
1. Differential Rates
Some critical reasons for these differential rates across states include differences in:
- Revenue needs: States with lower incomes and higher spending needs tend to charge higher sales tax rates to generate sufficient revenue. For businesses, this underscores the need to manage financial reserves wisely, including seeking the highest interest rates for savings. Those relying more heavily on sales taxes also tend to set much higher rates.
- Tax bases: Some states tax more categories of goods and services than others, allowing them to charge lower rates. For example, Hawaii has the broadest sales tax base and can get away with charging just 4%.
2. Exemptions
You may be pleased that most states provide exemptions from sales tax collection and remittance for specific businesses or products. Common exemptions include non-profit organizations or sales of food, prescription drugs, manufacturing equipment, agricultural products, and some services. If your business qualifies, you must apply for a tax exemption certificate. Or your customers may provide you with their certificate to prove you shouldn't charge them sales tax! It is a ray of hope in the complex world of sales tax compliance.
When expanding to new states, thoroughly research any available exemptions. Working with a financial advisor can help you identify opportunities to minimize tax liabilities while ensuring compliance with state laws.
"In the multistate sales tax compliance world, the devil is in the details. An informed approach, combining diligent research with strategic financial planning, is key to navigating this complex terrain. Stay proactive and seek clarity on exemptions to leverage every opportunity for your business's advantage." - Anthony Martin, Founder and CEO of Choice Mutual.
3. Special taxing districts
Special taxing districts can impact the sales tax you pay in specific areas of a state. These districts can levy additional sales taxes to fund local initiatives - most commonly transportation improvements, tourism promotion, or economic development projects.
Jim Pendergast, Senior Vice President at alt LINE Sobanco, explains, "For example, you may encounter a Public Transportation Benefit Area with an extra 0.9% sales tax to fund the local buses and trains. Or a tourism promotion area that adds a 1% tax to draw more visitors. As you expand into new communities in a state, be aware that some pockets apply these special district taxes atop the state and regular local rates."
4. Base Sales Tax Rate
As you likely know, sales tax rates may differ significantly across many United States states. Each state's base sales tax rate is one key factor driving these differences. It refers to the statewide rate for most taxable goods and services.
For example, while California has a base rate of 7.25%, Oklahoma's rate is just 4.5%. This disparity in base rates is one reason why sales tax compliance and calculations may be much more complex for your business if you sell products in multiple states.
5. Local Sales Taxes
Many states allow cities, counties, and other localities to impose their own sales taxes on top of the state rate. For example, while the state sales tax in California is 7.25%, local rates in some cities push the total tax rate to 9.25% and over.
Puneet Gogia, Founder at Excel Champs, advises, "To sell products across many states, you must account for any local tax that applies based on your customer's location. It may require integrating the local sales tax content into your e-commerce system or working with an experienced sales tax automation software."
6. Digital Products
Sales tax rules for digital products and services vary across the 50 states. For example, Arizona and New York apply sales tax to Software-as-a-Service products, while California and Georgia don't. Texas and Pennsylvania charge sales tax to online courses, while Oklahoma and Maine might not. It's essential to understand how digital products are defined where you're selling and how the state taxes digital goods. They are taxable there!
Sales tax filing Errors
There are some sales tax filing mistakes by the taxpayers. It involves:
1. Forgetting to include necessary information
Sales tax filings can be declined just for leaving some easy-to-forget information. That is like your signature.
2. Tripping up on taxable periods
If you have sales tax nexus in multiple states, you've probably run into this: some states want you to file annually, some want you to file quarterly, and others want you to file monthly. It can be straightforward to confuse the dates of a taxable period and file the incorrect sales tax amount. Especially since many states' definitions of a "taxable period" are slightly different. Be sure you're only filing the amount of sales tax you collected from customers during the right taxable period. Fino Partners takes care of that for you, too.
3. Filing late
Filing sales tax is hard. It may be hit with penalties and late fees.
4. Computation Mistakes
Sales tax forms are complex. Take California, for example. California sales tax filings require you to round amounts up and down until it feels hard to make your numerals match what they want to see. Be wary of calculation mistakes.
5. Needs to be correctly reporting tax collected
Sales tax reporting is not very hard. You tally up everything you've collected from a state. Also, you have to send that amount in. But here, in reality, states have other plans. Most want you to break down how much sales tax you've cumulated based on, city, country, etc. And if you sell on various channels, combining your sales tax reports can be challenging.
6. Not filing a return at all.
What's the minimum that can happen if you fail to file a return? You may be on the hook for a fine or get your sales tax permit revoked. This will happen even if you don't owe any sales tax. In the worst-case scenario, you're on the hook for criminal charges.
Concluding Remarks
You are looking for end-to-end sales tax compliance. It is necessary to ensure sales tax return filing across multiple states. Fino Partners is the complete solution you've been looking for. With hassle-free and transparent pricing, you can budget confidently without worrying about surprise fees. It's simple to understand pricing, which makes sense and provides a sense of relief from hidden costs.
Fino Partners provides the full spectrum of consulting, calculation, and compliance. In Fino Partners, your entire process is managed by seasoned professionals. Professionals with tax knowledge do it from start to finish. Get in touch to work with a transparent business with the expertise to take sales tax off your plate.
If you’re curious for more information on these, Contact us today!
