What does due diligence look like in the sales tax world? As a business owner, due diligence consists of analyzing the accuracy and taxability estimates and your businesses sales tax liability. It is a process of solving tax problems before they negatively affect your business. This will drastically reduce the amount of unpaid taxes you may owe a state.
Here is a brief guide of how to best practice sales tax due diligence to avoid over assessing your sales tax liability.
1- Determine Your Nexus
You’ve heard it from us before and you’ll hear it again. Always start with nexus. What is nexus?
Nexus is a link or connection to a state that allows that state to impose a sales tax responsibility upon you. There are two types of nexus:
- Physical nexus is when your business has a physical presence in a particular state.
- Economic nexus gives states the right to force out-of-state sellers to collect and remit sales and use tax if they meet or exceed a state’s economic threshold.
A thorough nexus review consists of looking into every state where your business has made sales and whether you have met the states nexus criteria. This is how you determine if you have the responsibility to collect tax.
Once you know your nexus footprint you will be one step closer to having a strong foundation to address any issues.
2- Determine Taxability
Next, you should look at the products or services you’re selling and evaluate if any are taxable. Depending upon your industry, you may find some of your sales are not taxable or have a sales tax exemption.
Identifying sales tax exemptions can save sellers time, effort and money. This step is especially important if you are a wholesaler or if you sell to exempt groups such as non-profits, schools and government agencies.
3- Determine Who is Responsible for Collecting Taxes
With every taxable transaction there is someone liable for collecting and remitting sales tax. In most cases, the responsibility is on the seller. However, if you utilize a marketplace facilitator, such as Amazon, Etsy, Walmart, those facilitators are responsible for collecting sales tax on every transaction.
How to Avoid Blind Spots
Oftentimes when we are overlooking an issue all we need is a new set of eyes. Many times e-commerce sellers struggling with sales tax compliance find that reaching out to an outside party for a different perspective can be beneficial. This can be a game changer and it doesn’t have to cost you anything.
We offer a free consultation to help you through your due diligence process. Conducting proper due diligence on unpaid taxes or a state audit assessment can greatly reduce your business’s total exposure and can save you hundreds of thousands of dollars. Find peace in mind, we would love to help you through your due diligence process. There is confidence in collaboration.