Taxes are complicated enough. There are many levels of complexities regarding taxes—federal, state, and local—that are intimidating for businesses from a number of industries. This can put a negative light on handling taxes, and can intimidate financial officers and accountants into working on taxes for their business with less knowledge, not enough credible resources, and information that may not be accurate.
The bottom line is that businesses need a firm tax plan. From sole proprietorships and consultants, to eCommerce companies, to SaaS companies, to B2B startups, and many other industry LLCs. You simply can’t avoid this topic if you’re operating any or multiple of these businesses.
Today, we’re going to explore sales taxes, and how any small-to-medium-sized business in any of these industries can navigate and handle them going forward.
If you’re shaking your head wondering if this is relevant to you, keep this in mind: niches like information services, marketing services, software services, data-processing services, and many other companies that follow that type of model are often under the impression that they don’t have to pay taxes because they’re providing a nontaxable professional service.
This is a big misconception. Ignoring your state and local taxes can negatively impact your business long-term in ways you may not even know.
With that in mind, let’s start with a clear overview of what sales taxes are and how they impact businesses locally and statewide.
Sales Taxes for Small to Medium-Sized Businesses
To start, let’s clarify how sales taxes are processed. This is universal for businesses that have a service or product to sell, and is very important to know for fast-growing companies with any industry background.
How do sales taxes work for small businesses?
Sales taxes are imposed on a company’s sales transactions to the consumer.
Typically, sales tax is imposed on a company’s sale of goods (items that can be moved or touched) or specified taxable services.
A company is considered the “agent” of the state which collects tax on its sales to the end consumer. Subsequently, the company records the collected tax as the sales tax payable to remit (pay) to the appropriate taxing authority. This is done on a monthly, quarterly or annual basis.
Nexus
One term that any small business or fast-growing company needs to add to their vocabulary is “nexus”. Ultimately, nexus will determine whether a company has a collection and filing obligation to a taxing jurisdiction depending on the goods or services that it sells.
“Nexus” is just a term that is used to describe a company’s sufficient connection to a specific taxing authority. That taxing authority then requires the company to collect and pay its tax.
There are both physical and economic variations of a nexus.
Employees, inventory, offices and other locations, trade shadows, third-party contractors, etc. are common examples of business activities that can create a physical nexus in a state.
A major shift occurred on June 21, 2018, when the United States Supreme Court ruled in South Dakota v. Wayfair, Inc. that states can require an out-of-state seller to collect and remit sales tax on sales to in-state consumers, even if the seller has no physical presence in the consumer's state.
Due to this case, sales that amount up to $100,000, or more than 200 transactions sourced to a state, will give a company economic nexus in that state.
Sometimes the definition of a nexus can vary (usually by jurisdiction). Because of this, you want to know how and where your business operates.
Here’s a quick summary of the flow of sales tax:
- Evaluate Business Activities for Nexus Footprint
- Decision to Register in a Jurisdiction
- State Issues License Number and Filing Frequency
- Company Collects Tax on Sales into State, if Applicable
- Company Remits Tax to the State
(Although, if you operate your business in any of these five states: Oregon, Delaware, Montana, New Hampshire, and Alaska, you won’t have to worry about sales taxes, as these states are exempt and don’t have sales taxes at all)
Now, when it comes to handling, managing, and filing those taxes, you likely have a CFO or financial controller who configures those numbers for your business.
Let’s explore why you need to get CFOs and financial controllers involved in handling your taxes (and how).
CFOs, Financial Controllers, and Working with State / Local Taxes Professionals
CFOs and accountants should be keeping tabs on all of your expenses and finances. When you have a question about how your money is flowing every week, month, and year, these are the people to turn to.
CFOs have four key areas of responsibility: sales growth, profitability, cash flow, and capital management. Usually, an accountant (or controller) will report to them.
The CFO is responsible for overlooking your profits. Small businesses operate in a competitive space, and CEOs can get caught up in the sales that roll in… but acquiring sales is not the same thing as acquiring profit.
CFOs should be dialed in on the big picture impact that sales and use tax could have on the company. They shouldn’t have to worry about the granular and monotonous tasks like state and local tax filing deadlines.
This includes keeping tabs on filing deadlines and requirements, which can be easy to overlook if you don’t know what questions to ask or where to find that information.
State Tax Advisors can help in that area. No matter where you are doing business, our specialized solutions can help you resolve state and local tax issues.
Our Recurring Data Preparation and Filing Services Include:
- A Dedicated Team of Data Experts
- Monthly Data Reminders
- Data Monitoring for Errors
- Identification of Variances
- Streamlined Communication
- Resolution of Variances
- Return Filing
Typically, the deadline for filing a sales tax return is the 20th of every month.
What makes this so important? If you’re a fast-growing company, you can become significantly impacted by any of these factors—from missed filing deadlines, to collecting the wrong tax rate, to incorrect rates, and more.
The potential consequences are not worth the risk. Missing or botching any of the above procedures can lead to being audited by the state, and thousands of dollars in penalty.
In Conclusion
In this guide, we walked you through the most important top-level details anyone should know when organizing taxes for their business. If you take to heart the knowledge we shared here, you’ll be more than prepared to handle the tough questions that come your way, even if you’re working with accounting or tax professionals.
For a quick recap, we covered:
- What sales taxes are
- What nexus is and a major ruling that changed the way nexus is defined
- The importance of a CFO and/or controller of finance in your business
- Filing deadlines and requirements for businesses
- Potential consequences of avoiding those tax regulations
To avoid the struggles new companies often face when handling sales taxes, consider turning to a professional or consultant who can help you directly.
State and local tax is complex. That’s why our experienced state and local tax team is here to support your company in achieving tax compliance. We help companies streamline overall processes, find solutions, and create the best plan forward. Not only do we pride ourselves in tackling complex tax issues, but we also strive to empower our clients with knowledge.
We’re here to help you get rid of the stress that comes with taxes and stay compliant, so you can return to what you should be doing: building your business. At State Tax Advisors, we’re willing to go the distance for you.
If you’re interested in working with us, give us a call today.