5 Potentially Costly Problems of Sales Tax Collection
As exciting as it can be to work with new small business owners, it’s also crucial for them not to overlook the mundane administrative tasks associated with running the company that, if overlooked, will result in significant headaches and expenses later. Sales tax collection and filing is just one example and doing it right is essential.
Most business owners who encounter trouble with sales taxes did not embark with an intent to mishandle collection and filing – they just weren’t aware of the “when, where, how and what” questions – when to file, where to file, how to file and what to file. Working with them to amend or prevent these issues has become more of a significant role for accountants.
Why? By the time clients realize how important these questions are and have the answers they need, they may already be on the hook for hefty fines and assessments.
Here are five common, and potentially costly, pitfalls to help them avoid:
1. Not knowing when to file. Filing deadlines can vary from state to state, and jurisdictions have different cycles, including monthly, quarterly and annual filing requirements. Tax jurisdictions also set different days of the month as filing deadlines. For instance, a business owner may start out in a state that requires a monthly filing on the 20th and then expand into a state where businesses are required to file by the 15th. It’s critical to know when filings are due in every state in which the company does business.
2. Not knowing the difference between sales and use taxes. Sales taxes aren’t the only kind of revenue business owners are obligated to collect; in some cases, companies are required to collect use taxes. Business owners need to understand what kind of revenue they are required to collect at the point of registration, and it can vary according to tax jurisdiction. If they file the wrong kind of tax, the taxing entity may reject it and ask them to refile, which can delay payment and leave the business liable for fines and penalties.
3. Not knowing where to file. Companies operate across tax jurisdictions can create what is known as a “nexus” – a business presence that requires compliance with the tax regulations for the local district. For example, a pizzeria in New York that delivers to customers in both New York and New Jersey could be obligated to file sales taxes in both states (if, for example, they use their own delivery truck), and failure to do so can result in major fines.
4. Not fully understanding exemptions. When filling out tax forms, sometimes business owners don’t understand all the nuances involved. For instance, they know that customers that are charitable organizations are exempt from sales taxes, but they don’t specify the type of organization, choosing “other” on the form instead of being more specific. This can cause trouble down the road when the taxing authority requests supporting documentation.
5. Not setting aside revenue collected. Business owners – particularly those who haven’t been in business long – tend to focus almost exclusively on daily operations. They collect sales taxes from customers as they’re supposed to, but they may not set the money aside, and after meeting payroll and paying vendors, sometimes they come up short, which can immediately turn into a major problem.
If any of these five common sales tax errors get out of hand, they can grow into a problem that threatens the survival of the business. That’s why it’s so important for business owners to fully understand their sales and use tax obligations and meet them in a timely, accurate manner.
Many successful entrepreneurs choose to partner with a sales tax expert to make sure they meet their tax obligations across all jurisdictions. Working with a partner that has an efficient processing platform and updated information for all tax jurisdictions can relieve the company of a heavy administrative burden.
The right partnership can also provide assurance that if the company is ever questioned or audited by a taxing authority, the business won’t have to go it alone and will be able to promptly provide documentation.
About the author:
Jonathan Barsade is the CEO of sales tax compliance solutions company Exactor.