Online Sales Tax: How to Tell Fact from Fiction & Save Your Business from an Audit

Think sales tax is just a rate? If you sell online, think again. For traditional brick-and-mortars, setting up sales tax is as easy as following your local jurisdiction’s tax laws. For online businesses, the process is more complicated: where your customer physically is when they are buying your goods matters to your overall rate.

Simply put, nexus laws require online businesses to collect state and local taxes if your business has a physical presence — whether it’s a store, warehouse or office — in that customer’s state. On the other hand, if your business does not have a physical presence in a state, you do not have to collect sales tax –– at least for the most part.

When it comes to calculating online sales tax, there are always exceptions and complexities. Don’t fall prey to common misconceptions around compliance. Here are five tax myths that could trip you up if you aren’t careful.

FICTION: Sales Tax is Just a Rate

FACT: Sales tax is complex and error-prone

Managing online sales tax compliance includes knowing which jurisdictions require you to collect sales, tracking changes in rates, rules and boundaries, understanding product and service taxability and substantiating exempt sales. With more than 12,000 taxing jurisdictions and 9.9 million product taxability rules in the U.S., that’s a big undertaking. It’s easy to make a mistake if you’re trying to tackle this manually.

FICTION: Automation is Only for Big Companies

FACT: Companies of all sizes can automate affordably

Most small companies manage sales tax by downloading rate tables, visiting state websites, plugging numbers into invoices, determining exempt sales and filling out complex tax return forms. Wouldn’t you rather be using this time to focus on sales instead of sales tax? Automated cloud solutions scale with your business and tax requirements. Look for a provider that integrates easily into your existing accounting system for fast, easy deployment and one that offers usage-based pricing, which is more affordable for smaller merchants.

FICTION: Audits Aren’t That Expensive

FACT: Audits can cost more than $90,000

If your company fails an audit, you won’t just be liable for unpaid taxes. It’s likely you’ll accrue penalties, fees and interest associated with under-payment. This adds up. Should the auditor come knocking, reduce your risk by having complete, detailed transactional data readily available.

FICTION: I Can Handle Sales Tax on my Own

FACT: Managing sales tax manually puts your business at higher risk

The days of DIY tax management are over. Even an accountant or finance manager may struggle to handle compliance manually given the state’s penchant to change rates, rules and regulations on a whim, not to mention the increased complexity triggered by expanding your business or starting to sell online. Automation frees up your resources and protects against audit risk. It’s exponentially easier to ensure correct handling of product and service taxability, jurisdictional assignment and exempt sales when it’s automatically done for you.

FICTION: Sales Tax Doesn’t Impact me or my Customers

FACT: Getting sales tax wrong can ruin your relationship and reputation with customers

Customers expect to be charged the right price for the right product in a timely fashion. If there is wide variation between the listed price for an online product and the final charges at checkout or upon receipt of invoice, for whatever reason, customers might not come back. In fact, of the 67% of shoppers that abandon online shopping carts, 41% of those do so for unexpected costs at checkout. Close those sales by ensuring your sales tax is visible and accurate from the get go.

It’s time to dispel these myths and get the real story on compliance. When you separate fact from fiction, it’s easier to streamline processes, protect your business and improve your bottom line.

Matthew Grattan – bigcommerce blog

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