Over the last 20 years, I have owned no less than 5 businesses. If there was one insight I could leave with you as a business owner, it is this – don’t ever go it alone on calculation, paying and filing your taxes. Getting behind on or missing payroll tax deadlines is probably the most perilous event you can face. The next most important thing to do, is to properly file and then pay your sales tax. Your vendors may forgive you or allow you to extend your obligation and you may even be able to carry inventory on time, but when it comes to the government, do not mess around. Miss-filling or not filling the appropriate sales tax, is what I want to talk about today.
In 1998 I was running a small but lucrative Direct Sales business outside of Seattle. At the time, since my projected federal sales taxes were under $10,000 a month, according to the FTC’s Sales Tax web site, I was within what the FTC referred to as “De-Minimus Filing Criteria”, or in other words, I believed that because my sales tax liabilities were under a particular threshold, I would only have to file my sales tax on the telecommunications part of my business, once a year and not quarterly, or even monthly, as most other businesses do. Little did I know, however, that even though my assumption was correct, I would come to regret that decision three years later – but I’ll get into that later.
It Seems Easy—At First!
Just when you might feel like you’ve got your CRM system all figured out, ready to take orders, calculate and collect sales tax and securely take and store your customers personal information, the inevitable bag of bricks drops on your head and you realize, wow, I have to collect sales taxes for more than 9,998 sales tax jurisdictions across the United States. Not only do I have to accurately calculate and collect these taxes, but now I have to report and pay them as well – and it doesn’t stop there. At some point, especially if you grow to any notable size, you will, at some point, have to deal with the sales tax audit that is sure to come. Just make sure that the system you are using can properly calculate, store and properly report these taxes and offers multiple ways for you to quickly verify that they have been paid and properly reported.
If that’s not confusing enough, don’t forget, all states have different rules when it comes to remitting your sales tax, and each rate is based on not only the specifics of the business, but may even take your type of product(s) into account. Even within the same city or taxing boundary, you may have different sales tax rules based on the local municipality and the type of entity receiving the tax (schools, bond initiatives, or temporary road or infrastructure needs) and the percentage owed to each of these requirements, must be calculated, charged, collected and remitted appropriately.
Then there’s the little question of, “should I pay quarterly, monthly or yearly?”
The simple answer is – it depends. Most states base the remittance requirements on the sales volume of the seller. For example, if you have to collect and remit sales tax in Colorado, its law says you will have to pay monthly, if you sell $10,000 or more per month. Every state is different and every difference has its exceptions. For example, we all know that the state of Oregon has no sales tax, right?! Well, that depends on the type of goods or service that is sold. Some products that have to do with the lumber or services industry (again, depending on what it is) may require sales tax.
The Lone Star State law requires sellers who collect $500 a month in sales tax to file monthly, and sellers who collect less than that are only obligated to file quarterly. If you collect $1,000 or less per year in state sales and use tax, the state allows you to file annually.
And finally, Pennsylvania has a slightly different take on the matter. The state law requires all businesses to begin by filing quarterly sales taxes during the first year, and then after that the state determines how often the business should file based on the amount of sales tax collected.
Because every state has different laws, you’ll need to learn what they are in every state where you’re required to collect sales tax. You can either contact the Department of Revenue in every state in which you have nexus, or you can use an automated sales tax system that will do the work for you. Either way, it’s critical that you stay in compliance and file your returns on time.
The point is, and I think you get it, calculating, collecting and remitting sales tax for each state in which you do business, can become very complicated. Again, make sure your CRM and/or Sales software can accommodate for these nuances. If you think you can “get by” simply by tracking and reporting sales tax rates on your own, you are mistaken.
One Step Further – Learning the Laws in the Counties Where You Plan to Sell
As you expand into other countries, the laws can and will differ greatly from those in the United States. For example, in some Asian Countries, you are required to calculate, collect and submit the projected sales tax at the time of the sale and although you may be required to give the purchaser up to three days to pay for the product, you must submit the transacted sales tax immediately. This is one of the many reasons why we encourage our clients to do their due-diligence before expanding into any foreign country. While there is no guarantee of one-hundred percent accuracy, using an automated sales tax system, is really the only way to go
Sometimes, it Doesn’t Even Matter
Now, back to my De-Minimus sales tax filing story. For three years, as I mentioned, I had been filing my telecommunication sales taxes under what I thought were proper filing guidelines. After all, I was following the guidelines as outlined on the FTC’s web site and I had even talked to an FTC representative at the federal level to verify I was filing properly. As I always do, I had recorded the name of the person I had talked to, the date I talked to him, the department he was in and his contact information, so I was covered, or at least I thought I was.
One bright, warm sunny day, (I remember it well, because again, I was in Seattle, it was a Friday, the sun was out, it was above 75 degrees and it was Friday – and nobody in Seattle works when the stars align like that), I received a phone call from a very cordial and polite (not really) individual from the FTC, informing me that I had not paid my taxes correctly for over three years and that I was now officially under investigation for tax evasion.
When the shock subsided, I asked what that meant and what I needed to do to correct the situation. The horror of my situation settled in after he told me, at the least, I would be investigated and could end up being charged with tax-fraud and could be fined thousands of dollars or; at worst, I could be found guilty, assessed fines and penalties, have my business liquidated and possibly spend up to five years in prison. I commented that I had all my notes (names, dates, emails and faxes) from my conversations with the person at the FTC who originally told me I was okay to file this way, but that didn’t matter. To make a year-long horrifying story short, I ended up getting off “easy” – paying over $120,000 in fines and penalties and receiving a year and a half jail sentence, which was soon after, commuted to probation. Why do I tell this story? To make you aware of the seriousness of properly filing your taxes. More importantly, to point out, that if I had been using a tax service, such as Avalara or Tax Cloud, to collect, manage and submit my sales tax, at the very least, I probably wouldn’t have gotten into this situation in the first place. Even better, I would have had the expert support and backing of my tax vendor, with all their legal prowess and expertise behind me.
At best, many providers will support you through this type of nightmare, lending their expertise, clout with the tax agencies and sometimes, even their legal support, to help protect your situation. Looking back, either way, using a full service sales tax provider would have placed me in a much better position through the entire experience.