Running an online store may seem easy until you arrive at sales tax compliance. That is a complex and daunting task. Did you know that there are over 10,000 tax jurisdictions in the United States? Add to it the constantly changing regulations, and you are bound to make mistakes that can lead to significant financial penalties. In this article, we will explore 10 common sales tax mistakes that online businesses often make.

Mistake 1: Failing to Collect Sales Tax in Nexus States

This can happen if you do not understand nexus laws, if you miscalculate nexus thresholds or If you ignore the impact of remote employees or contractors.

To avoid this mistake, simply understand nexus laws, and regularly review your business activities. There are various tools and resources available to help you assess your nexus footprint such as the sales tax software for small business. 

Mistake 2: Forgetting to Collect Sales Tax on All Sales Channels

Businesses often overlook the need to collect sales tax on all sales channels. This includes an online marketplace, physical stores, and other platforms. 

Hence, be aware of all platforms through which you sell your products, determine if you have nexus in states where you sell through different channels. Lastly, configure your sales channels to collect sales tax states in states where you have nexus.

Mistake 3: Miscalculating Sales Tax Amounts

Due to errors in tax rates, product classifications, or exemptions, it is quite common to miscalculate sales tax. This can happen if you are using outdated tax rate information or if you are misclassifying your products. To avoid this: 

• Understand product classification and how to do it correctly.
• Stay up to date on any tax changes, exemptions, and regulations directly or indirectly related to your business.

Mistake 4: Failing to Manage Exemption Certificates

If you do not manage exemption certificates properly, it will lead to unnecessary tax liabilities. Failure to provide valid exemption certificates will lead to paying back taxes, penalties and interest. To avoid this: 

• Obtain exemption certificates from all tax-exempt customers
• Keep the certificates up-to-date
• Keep accurate records of all exemption certificates

Mistake 5: Ignoring State Notices

Overlooking or disregarding state notices can lead to significant penalties and fines. Whether they are filing reminders, tax rate changes or audit notifications. This can also result in late filing penalties, interest charges, and even audit. 

So monitor your email and physical mail and respond promptly to notices. If you are unsure how to respond to a notice, consult a tax professional. 

Mistake 6: Making Common Filing Mistakes

Late filings, incorrect reporting, or errors in calculating tax amounts can happen due to a lack of understanding of filing requirements, inadequate record-keeping, or simply human error. They will cost you penalties, interest charges, and audits. So understand filing requirements, maintain accurate records, and use tax compliance softwares like sales tax software for small business. 

Mistake 7: Choosing the Wrong “Effective Date” When Registering to Collect Sales Tax

If you do not understand the effective date rules and end up choosing the wrong one when registering to collect sales tax, you will be accused of underreporting and will receive penalties and interest charges. 

So avoid making this common human error and understand effective date rules. If you think you cannot just consult a tax professional.

Mistake 8: Dropshipping Sales Tax Mistakes

These include misidentifying the nexus party or failing to collect sales tax in the correct jurisdiction. Once again, you are facing penalties and audits for underreporting.

So go over the specific tax rules that apply to dropshipping transactions. Then identify the nexus party, collect sales tax as required and if you are a dropshipper, provide resales certificates to your suppliers to avoid paying sales tax on purchases.

Mistake 9: Ignoring Retail Delivery Fees

Businesses may not be aware of or fail to comply with retail delivery fees imposed by certain states. This one can easily be avoided if you stay updated on state regulations and understand the applicable fees. Consider incorporating retail delivery fees into your product pricing to avoid passing the costs on the customers.

Mistake 10: Failing to Understand Home-Rule Jurisdictions

Businesses may not be aware of home-rule jurisdictions within states and fail to comply with their specific sales tax rules. Non-compliance with home-rule jurisdiction sales tax rules can result in penalties and fines. 

So identify home-rule jurisdictions and understand local rules where you have your nexus. 

Conclusion 

Sales tax compliance can be a complex and time-consuming task for online store owners. Now that you understand these 10 common mistakes, you are in a great position to avoid penalties, fines and audits. To stay informed about sales tax laws and to gain accurate rates, use sales tax software for small business.