Do you feel confident in your ability to calculate and collect sales tax?
If not, you aren’t alone.
The QuickBooks Tax team recently conducted a study of 600 small business owners. The study showed that 1 out of 10 small business owners feels unclear when it comes to managing sales tax.
Sales tax varies state by state which has long frustrated small business owners.
To complicate sales tax further, the Wayfair decision handed down by the Supreme Court last summer paved the way for additional state legislation and more confusion.
Did you hear about the Wayfair case?
Don’t be alarmed if you missed the decision. Only 29% of business owners in the QuickBooks study indicated they were familiar with the case.
If you sell products or services online, or in multiple states, you should evaluate how the Wayfair decision might impact your business.
The QuickBooks team has published a Sales Tax Calculator to assist you.
The Wayfair Decision
In South Dakota v. Wayfair, Inc., the Supreme Court reviewed a South Dakota sales tax law. The South Dakota law requires out-of-state sellers to collect sales tax if the seller’s business meets at least one of two thresholds:
- The seller delivers more than $100,000 in goods or services to South Dakota in a single year, or
- The seller conducts 200 or more transactions in South Dakota in a single year
In contrast to historical sales tax laws, the South Dakota law removes a physical presence analysis when determining whether or not a seller is required to collect sales tax for sales within the state.
The Supreme Court upheld the South Dakota law. South Dakota can now require certain businesses to collect sales tax regardless of whether the business has any employees, contractors, or locations in South Dakota.
Read also: 5 Small Business Taxes That You Should Know About
How will Wayfair impact your business?
The impact of Wayfair stretches beyond your business transactions within South Dakota. More than a third of US states have passed laws similar to the South Dakota law in question.
Some of these states waited to implement the laws until the Supreme Court issued its Wayfair decision. Other states were fighting for their sales tax laws in courts when the Wayfair decision became the law of the land.
The Wayfair decision provides a roadmap for all states that desire to increase their revenue at the effort of out-of-state sellers collecting sales tax.
Consider the worst case scenario for your business. If each state passes a law similar to South Dakota, each with a different threshold, you will be responsible for conducting a state-by-state transaction analysis of your business, and then apply the applicable sales tax rate to those transactions.
Tax law was complicated enough before the Wayfair decision. 2 in 5 of the small business owners surveyed by QuickBooks admitted that sales tax management is only somewhat clear. Now that the Supreme Court has opened the door for more complicated sales tax laws, your tax nightmares might become scarier yet.
Take a proactive approach to the Wayfair decision. Consultant advisors regarding future impact to your business. Identify resources that simplify sales tax requirements and processes.
Read also: How to Make Tax Filing Stress-Free
Simplify Complex Sales Tax Rules
56.2% of small business owners told QuickBooks that collecting sales tax is either only somewhat simple, or not simple at all.
Sales tax complexity led 1 in 10 small business owners to tell QuickBooks that they were not at all confident in their ability to conduct sales tax calculations. Only 1 in 2 considered themselves very confident.
These statistics should concern lawmakers. But, they should also prompt you as a business owner to take action.
Educate yourself and your business stakeholders. You may not be able to afford an internal tax department, but you can seek tax experts and business advisors to start your journey to understanding sales tax.
Evaluate your transaction exposure across the many US states. Research laws and best practices in the states where you conduct the most transactions.
As you familiarize yourself with sales tax laws in the states where you conduct business, you should receive some clarity.
Ideally, that clarity means you understand your sales tax exposure and responsibility. But, clarity might be the realization that you need to hire additional help, or purchase resources.
Advisors are helpful to identify your exposure, but automated tools help you fulfill your sales tax responsibilities in your day to day business.
Deploy sales tax tools
Sales tax tools help you navigate the intricate world of sales tax. Seek out tools that help streamline sales tax calculation and collection.
Modern accounting software typically include tax features. If your business uses accounting software, ask the provider about its tax capabilities.
Can the software automatically determine your business’ sales tax requirements? Can it apply appropriate sales tax to your invoices? Does the provider update the software as tax laws change?
To help small business owners simplify their sales tax calculation and collection, QuickBooks built a Sales Tax Calculator.
When you add sales tax to an invoice, the calculator automatically applies city, county, and state sales taxes according to sales tax laws around the US.
The calculator offers additional features to help you complete your sales tax responsibilities:
- Product categorization: for states that apply different sales tax rates to different product categories, the Sales Tax Calculator applies the appropriate tax rate.
- Collection and Reporting: QuickBooks tracks the sales tax you collect via invoices against what you owe to state governments. The calculator provides a breakdown by government agency.
- Sales tax filing: QuickBooks offers both paper and electronic filing options. The calculator keeps track of filing dates for each applicable state.
The Future of Sales Tax
From the early days of e-commerce, business owners have struggled to understand their sales tax responsibilities.
At the same time, states wrestled with whether or not they could require out-of-state businesses to collect and pay sales tax.
The Wayfair decision seems to have set the stage. States can require out-of-state businesses to collect sales tax for certain transactions within their state. 1 in 5 of small business owners indicated that this decision has them “very concerned” about the ruling’s impact to their business.
But, Wayfair isn’t the end of the story. The Wayfair decision has started a new generation of sales tax legislation debate and creation.
Expect states to pass and enact legislation to take advantage of the Wayfair decision. If states complicate the matter or over reach in their sales tax laws, expect US Congress to step in and pass legislation regarding sales tax.
The sales tax landscape will inevitably change in the coming months and years. More than likely, the process will be long and complex.
Seek out trusted advisors that can help you adjust to new sales tax laws as they take effect. Identify resources that can help you automate sales tax calculation and collection.
Take a proactive approach to sales tax compliance. Stay educated, and deploy effective tools.