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Small Business Digest


There Is A Sales Tax Danger Zone For Small Businesses In eCommerce

Most small businesses offering products through an eCommerce portal are unaware of the compliance muddle that exists somewhere between sales tax compliance and overt negligence. This is the sales tax danger zone.

With 11,000 tax jurisdictions in the U.S. and thousands of sales tax rate and boundary changes every year, getting sales tax right is nearly impossible for businesses that don’t have the right process. For this reason, a great number of businesses find themselves out of compliance with sales tax rules. Some simply don’t realize they are out of compliance. Others don’t have the resources to fully comply.

Will Frei, Sale Tax Specialist, Avalara offers this primer on this important topic:

What makes the danger zone so dangerous? If a business is out of compliance with sales tax statutes, they are at greater risk of incurring penalties in the event of a sales tax audit. This is no small matter given that the average audit costs small and medium businesses $20,000 to $30,000.

Other factors also contribute to the danger zone: states hungry for revenue after the recession are aggressively targeting businesses in the sales tax danger zone with more audits.

  • The New York Department of Taxation is comparing consumer debit and credit card purchase data to retailer sales tax returns in order to find businesses that have incorrectly filed sales tax returns.
  • The California Board of Equalization is taking the door-to-door approach, sending teams to all California businesses to determine if they are handling sales tax correctly.

How does a business know if it is in the sales tax danger zone? Some actions contribute to greater compliance risk: 

  • Businesses selling into multiple states are at greater risk of non-compliance than single-state sellers. The more states a business sells into, the more rules and rates it has to comply with.
  • Businesses that use look-up rate tables or calculators (i.e., handling sales tax compliance manually) are at greater risk of non-compliance. These tools don’t always provide accurate rates, and manual processes are prone to error.

What should a business do if it finds itself in the danger zone? A good starting point is to examine the businesses sales tax process against its sales tax requirements.  Can the process handle the requirements? To answer this question, a business may want to consult an accounting professional.

If a business is not equipped to handle the complexity of its sales tax requirements, it might consider outsourcing its sales tax processes to an accounting firm or a technology solution.  Outsourced solutions can automatically keep track of rates, changing laws, and filing deadlines.

One way Frei suggests is to outsource the process of determining what taxes to apply.  Not surprisingly, his company does just that amognst its other services.  But what he has brought to readers’ attention is very important.  Research this tax danger zone and choose alternative strategies carefully. Outsourcing can move a business out of the sales tax danger zone, saving time and money and dramatically reducing risk. 

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