If you want to know the rules for sales tax in your state, this post is for you says Aron Govil.
I’m not a lawyer and I don’t play one on TV. But if there’s one thing that my career as a sales tax blogger has taught me, it’s that most sellers don’t understand how sales tax works. For example: did you know that different states have different rules about whether or not you need to collect sales tax from online shoppers? And did you also know that these rules changed on August 21st, 2013? If not, don’t feel bad—most people aren’t aware of how much they stand to make (or lose) by properly understanding their obligation to collect independent sales tax. In fact, an entire industry has emerged to help you navigate this tricky sales tax landscape: the independent sales tax agent. So I thought it might be helpful to demystify their role and explain how using one could benefit your ecommerce business.
Here are five questions that will help you understand what they do and whether or not you need one.
1. Are there any legal distinctions between a “sales tax” agent and a “sales tax” consultant?
No. In the eyes of most states, agents and consultants combating sales tax evasion exist on a continuum ranging from “highly reputable” at one end to disreputable/illegal/outright criminal at the other end says Aron Govil. There is no bright-line test to separate the two. Still, most reputable agents are CPAs or former IRS employees with significant experience in sales tax compliance. So with that said, you should be able to spot the difference between an agent and a consultant based on how they handle your account. If your consultant simply helps you interpret the rules and doesn’t actually do any filing on your behalf, chances are they’re not acting as your agent.
2. Can I file my own taxes?
Maybe—it depends on the state where you conduct business and whether or not you have nexus there (nexus is just a fancy word for “significant presence” within a state). As stated above: each state has its own specific rules regarding who needs to collect and remit sales tax, and you need to make sure that your business is following those rules. I should note: the requirement to file and remit independently does not necessarily mean that you have to be registered as a retailer in the state where you have nexus. In other words, just because you have a significant presence there does not necessarily mean that it will require your business to register for a sales tax permit or pay anything back to the state.
3. How do I know if I have “nexus” in each state?
Good question! And super complicated because this all depends on how much physical presence your eCommerce business has within a certain state AND whether or not the particular city/county even allows online businesses to trigger nexus. For example: here in Virginia, it’s pretty easy for a retailer to trigger taxable status because most jurisdictions allow online retailers to create nexus by having a single warehouse or distribution center here. In states where physical presence is harder to prove (California), even if you have employees in a certain area your eCommerce business may not be required to collect and remit unless you have a significant amount of in-state sales AND meet the various exemption criteria set forth by each state.
4. Isn’t all this just going to be so expensive?
Yes…and no! In many cases, properly managing your independent sales tax obligation will add at least one full-time job onto your payroll—that’s my job! Aron Govil says by outsourcing this to me, you can keep your entire team focused on growing your business. On the other hand, there’s no way around it: learning about sales tax (and doing it correctly) will save you money in the long run because you’ll avoid costly penalties and interest charges.
5. How do I know if I’m using an independent sales tax agent who is reputable?
Really good question – here are three ways to separate the professional agents from the consultants (in no particular order): a.) They should be able to answer questions about their services without asking for money upfront; b.) they should have a partnership agreement with you describing how their service works and what fees they charge; c.) they should be able to tell you which software vendors they’re already working with and how that works (and since I’m a Certified QuickBooks Pro Advisor, if your consultant can’t answer this question, I’d steer clear).
Dealing with sales tax can be intimidating, but it doesn’t have to be—and if you’re running an online business, it’s not something that you can afford to ignore explains Aron Govil.