When it comes to sales & use tax for small to medium-sized businesses, it is critical to understand what makes you compliant, and what puts you at risk. In order to help you avoid an audit, we have put together a list of 5 things you need to know specific to your business:
Determine the states in which you have nexus. Nexus definitions vary by state so it is important to research the rules for states in which you have any connection (doing business, sending salespeople, etc.)
Know what and who are taxable or tax exempt.
Tax rates change frequently - approximately 600 changes a year. It is important to keep up with these rate changes to ensure you are collecting and remitting the correct amounts.
Should you be taxing based on the origin of your product/service or its destination? This distinction directly affects how much you collect and report to the state which needs to be accurate to avoid an audit.
5. Returns Filing & Remittance
Once you have ensured you (1) collected tax from all the necessary states, (2) on all necessary products/services, (3) at their origin or destination, (4) and at the correct rate, you need to (5) file & remit. This process can be complicated depending on the states returns filing & remittance rules. Some states require filing down to the jurisdiction level so be sure to do your due diligence.
Beyond that, SMBs should understand what triggers an audit and can consult our 5 triggers to look for blog, which include:
- A significant percentage of exempt sales: This can trigger audits because of misinterpretation of the law, errors in taking exemptions or outright non-compliance.
- Nexus but no registration: If you’re not registered for sales tax but you pay another kind of tax in the same state, you increase your chances of an audit.
- Late filings: Consistently filing your returns after the due date or remitting the tax payment in a non-timely manner can be red flags.
- Incorrect math: Frequent math errors can draw enquiry; these are often the result of a large increase in sales.
- Current vendor audit: If a seller is being audited and they haven’t charged you the correct sales or use tax, the auditors may turn their attention your way.
The bottom line is that sales & use taxes are complex and continually changing. This can be challenging for SMB’s with limited resources, so automating this process proves to be very valuable – and cost-effective.