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4 Ways to Improve Sales Tax Compliance for Micro Businesses

Dec 13th 2017
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Are you familiar with micro businesses as a viable business segment and potential client goldmine with their distinct differences in revenue, geographic scope and where they sell products?

According to the Small Business Bank, micro businesses have one owner and up to five additional employees. That’s certainly small, but by no means insignificant; the real impact of this group comes into laser-sharp focus when it comes to the impact on the economy: 92 percent of all U.S. businesses are considered micro businesses!

The National Small Business Association (NSBA) reports that tax compliance is one of the top issues facing small business; in fact, one-in-three small businesses report they spend more than 80 hours each year on sales tax compliance.

Sure, small businesses are country cousins to micro businesses, but their size does not lessen the compliance burden. Micro business owners are often pressed for time and resources because they want to concentrate on developing their companies rather than back-office matters.

In fact, micro businesses actually have greater compliance risk than small businesses because they typically have a larger proportion of sales from the internet and do not have budget for software to help manage sales, CRM or even shipping.

Here’s how to evaluate and improve the sales tax compliance of your current or potential micro business clients:

1. Understand State-by-State Requirements

Begin by defining the nexus requirements of states your clients currently do business with and determine what their current process is for determining and charging sales tax. Are there gaps?

Next, evaluate the nexus requirements for states your client may begin doing business with, determined by their advertising or marketing efforts, and the location of website viewers (available via Google Analytics). Even if your clients are currently compliant, they might not have a system in place to ensure compliance with additional territories.

Make a particular note of the threshold of nexus for each tax jurisdiction. It’s important not to file for a local sales tax license too early because it can result in time wasted on filing $0 returns later on.

Help your client understand what each state’s definition of a “material amount” of sales might be, warranting application for a state and local tax license. Keep your client’s business expansion ambitions or marketing activities in mind; filing for a license too late will increase the risk of back taxes and penalties.

Accountants should also help their micro business clients understand what can trigger nexus in a state. As a micro business grows or expands its operations, it should be aware of the sales tax implications – as should you, since you’ll be ensuring their compliance. Warehouses (including Amazon’s), business affiliates (including click-through affiliates or online-referrers), remote employees, inventory or drop shipping from a third-party vendor in another state can all trigger nexus.

2. Sales Tax Implications of How and What Goods are Sold

It’s important to take stock of the goods and/or services your micro business clients sell and how they go about selling them. You’d be surprised at some of the sales tax distinctions on the books. In some states, for example, sales tax requirements differ if food is served in a to-go bag or on a plate.

Sales tax collection can also differ if shoes are considered “everyday wear” or fancy dress shoes. Help your clients understand how official definitions of relevant goods and services can impact their sales tax obligations. Appropriate measures can be taken to minimize the sales tax requirements, such as selling six or more donuts at a time, not less.

3. Compliance Check-ins

Micro business owners typically have hectic schedules, an overload of responsibilities and small staffs. According to the same NSBA survey, 65 percent of micro to small business owners said sales tax compliance has a significant impact on the day-to-day operation of their business.

Given the limited resources and known burden of compliance, accountants should suggest several compliance check-ins throughout the year. This will prevent any issues from escalating or going unnoticed for too long.

Compliance check-ins will also allow accountants the opportunity to suggest the appropriate approach or change in business procedure to address evolving sales tax needs, such as hiring additional staff, purchasing necessary software, or negotiating more favorable rates with vendors or shippers as volume increases. Finally, compliance check-ins will present an opportunity to review any recent changes in tax requirements for the areas in which your clients do business.

4. Evaluate Automation Options

The most efficient way to ensure your micro business clients are sales tax compliant is to leverage software with cloud-based, automated features to automatically apply the correct sales tax based on the goods purchased and the shipping location of the customer. With more than 11,000 sales tax jurisdictions in the United States, manually tracking the location of your clients’ sales can be more trouble than it’s worth.

Sudden growth in your sales could mean a costly fine from non-compliance. Automation of sales tax collection and remittance reduces human errors and missed sales tax collection, problems that frequently plague micro businesses.

Determine Your Options

Many accountants might dismiss micro businesses as a viable and continuous revenue source, but remember that micro business owners are still business owners who need your help and guidance to not only remain compliant, but successful as well in their accounting and tax concerns.

If you do not yet have micro business clients, perhaps set a goal for the New Year and find ways to reach out and find them. Remember, they need you as much as you need them!