Sales taxes are a pain for most businesses. Business owners must act as the unpaid agents of the government in deciding what and who gets taxed, collecting the tolls, and remitting to one of many state governments, while hoping that all is correct to avoid penalties and intrusive audits. I won’t tell you that there are “seamless” solutions out there but certain apps and automation services can help.
QB (herein, both QuickBooks desktop and QB Online products) have native features for dealing with sales taxes, but leave much of the decision making on each transaction up to the business. A wrong guess can leave your operation liable for uncollected sales taxes, which often generates losses on affected transactions (yes, because local governments often make better margins on sales than the business).
Sales Tax Compliance can be Complicated
Long ago everyone agreed that sales taxes should be simple: businesses would collect a small tax on certain sales and local governments would not interfere much. But things have changed. Many businesses operate from more than one location now, there are e-stores, and local regulations have grown vastly more complex in providing special exemptions to favored taxpayers and products, and many local governments (in California for example) have piled-on with special tax surcharges.
Following are 9 quick overviews on areas to know about in deciding how your business can best comply with sales tax requirements. Increasingly, and like payroll taxes, sales-taxes cannot be managed by mere humans and are best handled by some great apps and web-services specializing in this area (some listed at the end of this article).
1 All of My Nexus Live In Texas
The first issue in dealing with sales taxes is “Nexus.” If your business has a nexis (defined loosely as a significant presence where you may be using local government resources) in a taxing jurisdiction, you are likely required to deal with their sales tax codes, tax rules and more. You may want to ask an accountant or colleague about this (or your QB sales tax app provider), and read-up on the local situation yourself, because the local definitions of nexis vary widely. Sometimes nexis means a brick-and-mortar retail location; sometimes it means someone representing your company who visited a locality for the most trivial reason and now you are liable for sales taxes. It just depends.
Then there is the question of where to apply the rates: what if a business located in the city north of you buys a pallet of materials delivered to a job site south of you? QB leaves the decisions on this to the user. Which can be done but takes time; this is where sales tax apps come in – these services integrate with QuickBooks and generally manage all of these sales tax compliance issues – allowing the business owner to focus on more productive areas. The software decides which addresses are relevant to particular products and localities, determine the right tax rates and automatically mark-up your invoice.
Businesses are increasingly required comply, file and pay sales taxes in multiple jurisdictions if they meet the local definition of “nexis.” Look into this to make sure that you are not incurring this liability and failing to pay. I wish that I could say that this is quick, easy and “seamless” (always a favorite marketing word in technology). But it isn’t.
So find this out first – where is your nexis? (One or more).
2 Records, Documents and Audits
Sales tax audits are a fearful experience for most small business owners. Tax audits are becoming more frequent as the government seeks to use more powerful IT tools to help increase its revenues. The key is to set up and maintain an efficient tax supporting system rather than approach this in small increments as most businesses do. This is obviously a lot of time and work but once again sales tax apps and QB web services will continually keep most items in place and ready. A fast and well-maintained system cannot help but impress auditors.
3 Is the Customer’s Zip Code Enough?
No. Zip codes are primarily for post office use and are usually but not always good for determining the customer’s exact municipality or special tax district. Sales tax apps can decide on this for sure, and save significant amounts of time – and uncertainty – on just one sale. This is best accomplished by figuring customer location using latitude and longitude coordinates. Integrated QB Apps can do this faster and more accurately than mere people.
4 Is Sales Tax e-Filing Required?
An increasing number of states require e-filing of tax returns, mainly to reduce processing and compliance expenses (on their end, not yours). But this does have its advantages for small-businesses. Getting and electronic relationship with your state (and through this, localities) can be accomplished by setting up and logging into your sales tax account, which normally lists histories, payments, due dates, balances etc. QB sales tax apps can easily connect with most state portals to file and pay returns.
5 Which Products Are Taxable?
Once again, state and local tax laws vary widely. A product taxable in one area might not be in another. QB apps and QB Web Services generally reduce this to a one-time effort in mapping your product lines to UPC codes, which are then be compared against different nexis to determine the sales tax. This makes these calcs much easier and reliable. There can be a big exposure here so don’t assume that things are the same everywhere.
6 Sales Tax Exemptions
May customers claim special exemptions from sales taxes, resulting from loopholes in local laws. For example, in southern California there is an exemption for media production equipment. Sales tax exemptions make everyone happy until there is an audit. An audit may disallow many of these exemptions and result in large increases in sales taxes due, penalties and interest. Going back to customers and asking for repayment of their disallowed exemption is not likely. Few customers like being told that they must pay sales taxes, but make sure that all is correct here before the product ships. For each situation, review if the customers’ tax-exempt status is current and agrees with the terms of their claimed exemption.
7 Up-Front Sales Tax Deposits?
New taxpayers and larger businesses may be required to pay a big chunk of estimated taxes at the beginning of each period. This is determined as your account is set up, or if payment and collections problems result afterwards (which often can be appealed). Check the prepayment situations in the areas where your firm has a nexis. And note that some jurisdictions may have more frequent filing schedules than regular returns.
8 Sales Tax Payable Account
Sales taxes are handled differently than other payables in QuickBooks Desktop and QuickBooks Online products, and these are frequently shown on the balance sheet incorrectly. And the difference drifts to larger and larger amounts over time. Keep this under control by reconciling QB vs actual after each sales tax return is filed. At the end of each reporting period, your sales tax payable (balance sheet) account should normally be zero, or contain just a week or two of liability. If not, get a QB expert to make this right.
9 Automate Sales Taxes With QB Apps and Web Services
The overall objective in this business area is to comply with sales tax laws in the most cost-efficient way while minimizing risk of an audit. Sales tax apps can integrate into both QuickBooks Desktop and QuickBooks Online products to get the job done faster and with fewer errors than conventional methods, and keep great records too. The sales tax environment is just too complex these days for amateurs, and like payroll taxes, it’s best to pay a QB app or QB web services expert a small fee to get the job done right.
Your company is already paying a lot for tax compliance but it’s all hitting your P&L as accounting salaries. As sales taxes grow more complex and ubiquitous, sales tax automation increasingly becomes the best path to accomplish these goals.
Sales Tax App Providers
Some of the current players in the market for sales tax apps and (for QB Desktop products) QB web services include:
- Avalara Ava Tax (my fav)
- Davo Sales Tax
- Exactor QuickBooks Sales Tax Module
- Taxify
- LumaTax
Google these apps to learn more.
