Is your e-commerce business making these sales tax mistakes?

Last week’s blog post provided an overview of sales tax for small e-commerce businesses. It discussed economic nexus, and that’s a good start.

However, sales tax for e-commerce deserves a deeper dive because mistakes can have serious economic consequences.

That’s why this week’s post will go into more depth on common sales tax mistakes and how to avoid them so you can keep your e-commerce business running smoothly.

Let’s go!

Mistake #1: Neglecting Sales Tax on Services

There’s a common misconception that sales tax only applies to tangible goods, but it simply isn’t so.

Like with economic nexus, every state makes its own rules about what services, if any, require sales tax to be collected.

They even determine what a service is and what a tangible product is. For example, if you sell software as a service (SaaS) in Alabama, it’s subject to sales tax. That’s because the State of Alabama considers computer software a tangible product.

But in Mississippi, no sales tax is applied to SaaS. Ohio law says if you sell SaaS to a business, it’s taxable, but not if you sell it for personal use.

The bottom line is that state laws are a patchwork, so it’s best to consult a tax professional when selling your e-commerce services across state lines. They can help you navigate each state’s laws and ensure you follow the proper procedures to collect and remit sales tax.

Mistake #2: Misinterpreting Resale Certificates

If you sell a physical product across state lines, you’ll want to be familiar with resale certificates.

This certificate keeps your business from paying sales tax on items you plan to resell. So, if you buy widgets wholesale and plan to sell them at retail costs to your customers, a resale certificate helps you pass along the savings.

They even apply to items used in products you plan to resell. For example, if you sell wooden widgets, you can get a resale certificate for the wood used to make them.

The key is not to use the certificate to buy something you’ll use to run your business. For example, you can’t use a resale certificate to avoid sales tax on computer equipment used to run your widget business.

That would constitute fraud.

Vendors are sensitive to this because they are on the hook if an audit occurs and they sell to someone with an invalid certificate or who bought items intending to perpetrate fraud.

Like most sales tax laws, each state has its own regarding what certificates are needed and accepted. You can read more about that topic here.

The key is to stay organized and get help, which brings us to the next common issue.

Mistake #4: Failing to Keep Accurate Records

There are serious negative consequences for poor record-keeping in sales tax compliance.

They include fines, employee lawsuits, failed audits, and lost business opportunities. None of these is appealing, but as mentioned earlier, sales tax regulations can get complicated.

So, keeping accurate records is essential, but it isn’t easy. You have to track sales, resale certificates, and tax remittances.

The good news is that there is no shortage of effective accounting software programs and systems to help manage all these areas. The bad news is that choosing the right one for your business is difficult.

You can start your research here, but it would hurt to ask for advice from a tax professional.

No matter what system you choose, it will only be as good as the user. So, regularly reconcile tax data with financial records to ensure accuracy.

The Bottom Line

Getting sales tax right when selling in multiple states is challenging. By avoiding these three common mistakes, seeking help from a tax professional, and creating systems of organization, your business can avoid negative consequences.