Sales tax due diligence – or analyzing the accuracy of taxability estimates and company compliance – can save ecommerce businesses five to seven figures in liability. In this post, we break down how to do it.
A lot goes into managing the sales tax compliance for online businesses. And the rise of nexus calculators and automation software has streamlined the process of getting a taxability assessment. But too many owners overlook a key step: due diligence or the process of solving tax problems before they can hurt your business. Examples include minimizing your total taxability or reducing the amount of unpaid taxes you owe a state.
In this brief guide, we break down a few due diligence best practices that will help you avoid over-assessing your sales tax liability.
Before you can reduce your taxability, you’ll need to know precisely where you have sales tax 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:
Conducting a nexus review involves looking at every state where your business has made sales to see if you meet either of these criteria.
After the nexus review, you’ll know exactly what their nexus footprint was and in which states they had a responsibility to collect tax.
Once you’ve completed a clear assessment of your tax responsibility, you’ll have a strong foundation to mitigate your sales tax responsibility and address any issues.
After conducting a nexus review, you should then look at the products you’re selling and evaluate if any of the items were taxable.
Depending on your industry, you might find that a portion of your sales are not taxable. For example, in some states the sale of supplements and nutrition products are either non-taxable or taxed at a reduced rate. The sale of apparel and skin care products might also be non-taxable.
Sometimes, one of the parties involved in a transaction won’t have to pay sales tax on a taxable product or service. This is known as a sales tax exemption.
In addition to saving buyers money, exemptions also save online sellers time and effort by reducing the amount of tax they have to collect and remit.
There are two main types of exemptions you should look for.
First, if you’re a wholesaler, some transactions are tax-free if you collect and save the right exemption certificates. This moves the taxability of the product from the middle of the supply chain to the end consumer.
Second, if you sell to exempt groups – like schools, non-profits and government agencies – you won’t have to collect and remit sales tax on those transactions. You might also be able to achieve a significant reduction in your sales tax responsibility.
After a taxability review, reducing the company’s exposure for uncollected taxes, you should then look for transactions where your business wasn’t actually responsible for collecting the tax.
On every taxable transaction, someone is liable for collecting and remitting sales tax. On most transactions, this responsibility falls on the seller. But in states with marketplace facilitator laws, facilitators like Amazon and Walmart are responsible for collecting sales tax on every transaction.
If you look through your sales and identify every marketplace transaction that occurred in states with marketplace facilitator laws, you can shift all the responsibility for these transactions to the facilitators.
If you’re conducting due diligence on unpaid taxes or a state audit assessment, this process can greatly reduce your company’s total exposure. We’ve seen businesses save hundreds of thousands of dollars through this step alone.
And if you’re working on improving your compliance solution, shifting most of the work to marketplace facilitators can make life so much easier.
When you’re really close to a problem, it can be hard to identify processes or blind spots that are costing you more than they should.
For that reason, many ecommerce businesses choose to contact an outside party for a different perspective on things they might be missing. Similar to getting a second opinion from another doctor.
The best part is that, unlike a doctor’s visit, a second sales tax opinion doesn’t have to cost you anything. Some sales tax specialists offer free consultations to help you during your due diligence process.
A lot goes into managing a business’s sales tax compliance. But conducting the proper due diligence to analyze your company’s taxability – or hiring a sales tax specialist to do it for you – could save you tens of thousands of dollars.
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