For most companies, sales tax is a confusing, frustrating, and difficult component of doing business. Each jurisdiction has specific requirements and rules related to what is and is not taxable — as well as when it should be collected. It is also time-consuming and expensive to set up processes and software to collect sales tax in a required location.
Perhaps the most frustrating element of all is the fact that the business is responsible for collecting sales tax from individuals and if the taxes were not collected, the company is usually left paying the sales tax on behalf of customers. For these reasons, most businesses tend to put off collecting sales tax, which can cause issues as the business grows. Here are a few reasons why collecting sales tax is important and is worth the initial investment.
Once most businesses ultimately start collecting taxes, they are usually years too late. For this reason, the amount of taxes that should have been collected and paid is significant and typically there are fees or penalties related to non-payment. Unfortunately, the business is stuck paying the bill since no processes were in place to collect sales tax when purchases were made. Depending on how much of a tax liability there is, this expense can be crippling for a new or small business.
For businesses that find themselves in this situation, most states have voluntary disclosure programs that give partial or total amnesty to businesses that are filing for the first time. These programs can be helpful if the tax liability is significant because they can reduce the amount that is due and allows the company to become compliant. Even with these programs, it is beneficial for a company to implement sales tax collection as part of their accounting processes as early as necessary so that they are not stuck paying for taxes that should have been collected from customers.
Since most businesses don’t begin to collect sales tax until several years into doing business, there are typically changes that need to be made to the sales process with customers. These changes usually require updates to internal software, outside consulting and guidance, and multiple employees working to set up new sales tax-compliant processes.
The larger the company is and the further from the date that taxes should have been collected, the more expensive and time-consuming this process becomes. If the company can make an effort to put these processes in place early on, this can greatly reduce the time and effort needed to begin collecting taxes, and will reduce the amount of sales tax payments the company will have to make on behalf of customers.
Most businesses require cash from outside investors or debt from lenders (including business loans) in order to finance operations. Typically, these outside investors or lenders will perform some type of due diligence to ensure that the company is in a good financial position and worth the investment. One of the items that is part of this due diligence process — especially if the company is growing rapidly — is related to sales tax compliance.
Usually, investors will want to know if the company is compliant to ensure there are no outstanding liabilities. If the company does have a large sales tax liability, this can slow the process of collecting funds and, in some cases, halt the investment of cash altogether. This lack of capital can hurt potential growth for the company and can possibly be the difference between a company continuing or failing altogether.
If a business with a quality product is well-run, the owner(s) may be fortunate enough to find themselves in a position where they are able to sell the business. This can be a life-changing event for the owner of the business. However, if there are significant outstanding sales tax liabilities, an acquisition can quickly turn from a very promising opportunity to a very frustrating and disappointing fallout.
Very similar to the process of capital being invested or lent to a company, the sale of a company often requires due diligence procedures. As part of these procedures, sales tax liabilities are often examined. If there is a significant liability, the owner may have to put a portion of the potential proceeds from the sale in escrow to pay for the outstanding liabilities or, in some cases, the deal may fall through. These issues can also extend the process of selling the business, which brings additional legal and accounting fees, as well as undue stress.
If you are an owner or executive of a company that is not collecting sales tax, you may be wondering if any of this applies to you. The most likely answer is “yes” — and if you have any employees or sales in multiple states, there could be multiple states where sales tax needs to be collected.
The first step to collecting sales tax would be to have a sales tax nexus study performed. A sales tax nexus study analyzes three items:
Multiple CPA firms specialize in this type of service and can help with this study. Once the study is complete, the next step would be to correct any potential outstanding liabilities and update processes so sales tax can be collected moving forward. As mentioned, most states have self-reporting programs that can limit the amount that needs to be paid.
Overall, sales tax compliance is an issue that should be addressed sooner rather than later. While the initial implementation can be difficult, it will be much less difficult and painful than waiting until a sales tax audit or a future event that forces a company to become compliant.
Sales tax will impact Smith.ai clients differently based on physical business location. Not all clients will need to pay sales tax. All states have different rules and requirements for collecting sales tax, so please reach out to our team at firstname.lastname@example.org to determine if sales tax will be applicable to your purchase. If sales tax needs to be collected, the invoice created by Smith.ai will show you the rate and amount that will be payable under state sales tax guidelines.
Below are important details and definitions for sales tax that may help in your research and in determining whether or not you are required to pay sales tax.
Tax rate: The customer will be made aware of the tax rate that is being applied to their purchase. The sales tax rate can vary depending on the state, county, and city, so it's important to check the rate — based on the location where the purchase is being made.
Refunds: If a customer returns a product, they may be entitled to a refund of the sales tax they originally paid. However, refund policies can vary by state, so it's important to check the regulations in the customer's specific location.
Exemptions: Some customers may be eligible for sales tax exemptions. For example, certain organizations such as non-profits or government agencies may be exempt from paying sales tax. Make sure you are aware of your organization’s filing status.