5 Reasons Your Online Businesses Needs a Sales Tax Automation Platform
With many online retailers being forced to collect and remit sales tax, small businesses are quickly realizing that filing sales tax returns by hand is much more difficult than they had imagined. In this article, we lay out the top reasons why your online business should begin using a sales tax automation platform.
1. You’re selling on Amazon, which creates a massive sales tax footprint
Most Amazon sellers don’t realize this, but when you send inventory to an FBA warehouse you’re actually creating a sales tax obligation in multiple states. That’s because Amazon will automatically send your inventory to warehouses all over the country to enable Amazon Prime’s 2-day shipping. This, in effect, creates a sales tax obligation because your business has a “physical presence” in multiple states.
You might have heard that Amazon already collects sales tax in every state, and believe that you don’t need to collect sales tax. Unfortunately, Amazon is only collecting sales tax on products that they own. Amazon is not collecting sales tax for the products that you’re selling. This gets even more tricky because states are beginning to audit Amazon FBA warehouses to find sellers who are not complying with sales tax laws.
By using a sales tax automation platform, online retailers are able to easily identify which states their inventory is being stored, what their sales tax liabilities are in each of those states. You can even submit sales tax filings automatically each month without lifting a finger.
2. You sell products that have special tax rates
While most tax-savvy businesses realize that each state and municipality has different tax rates, you might not realize that the tax rate varies based on the product you sell. There are literally tens of thousands of different product tax codes in the United States. If you have a large portfolio of products you sell, there’s a good chance that at least a few of them have special tax considerations.
Did you know that a Twix bar is considered “candy” in one state, but not in another (that’s because Twix contains flour, which means many states technically treat it as a “food” and not a candy)? Or how about the fact that polarized sunglasses are taxed differently from non-polarized? Product taxability rules can get really crazy.
You should pay special attention if your business sells the following:
- Digital goods (e-books, software, online courses, SaaS, etc.)
- Supplements and health-related products
- Food, groceries, and candy
Even if you don’t sell one of the items above, there’s a good chance you’re selling an item that has unique product taxability issues. It seems like no matter what product you’re selling, a legislator has probably made it their mission to come up with a novel way to tax your product.
If your business only sells on Amazon and your product taxability codes have been set-up within Seller Central, you’re probably okay. But if you sell products via your own website, there’s a good chance that your e-commerce platform doesn’t have native product taxability settings and you could be collecting and remitting the incorrect amount of tax.
If you sell multiple products and need a reputable sales tax professional who can determine which of your products have special product taxability considerations, I recommend that you check out Simek Tax.
3. You simply don’t have the time to deal with it yourself
Most businesses can handle filing sales tax returns themselves if they’re only filing in one or two states. But once the filings begin piling up, they usually can’t devote the time needed (usually 2-3 days/month) to deal with them. The work is boring, error-prone, time-consuming, and distracts from value-added activities you could be doing (like investing in marketing). By using a third-party sales tax filing automation platform you’re putting the burden on another company. It’s their problem now (not yours).
If you are paying an accountant or bookkeeper to handle your filings it is probably a wise idea to compare the price of a sales tax automation tool with their hourly rate. I’ve come across a few businesses that were paying their CPA over $200/hr to handle their sales tax filings each month. Some of these sales tax platforms only cost only $50/month to submit all of your monthly filings.
4. You want to protect your business from a costly sales tax audit
One of the things that sales tax platforms are great at is creating a meticulous paper trail which will prove valuable if you’re ever (gulp) audited. When sales tax auditors coming knocking, they’re going to be looking to answer the following questions:
- What products is this business selling?
- How are those products taxed in my state?
- Can this business prove that they were calculating, collecting, and remitting the right amount of tax?By using a tool like Taxjar (or similar tool) you’ll be able to prove to auditors that you were complying with sales tax laws all the way down to the transaction level. All you’d need to do is download a transaction report from the system, send it to auditors, and you’re done.
5. You want to protect your business as sales tax laws change
It might seem like sales tax laws are a part of some codex that hasn’t changed in centuries, but that couldn’t be further from the truth. Sales tax laws are constantly changing and special attention needs to be paid to ensure that your products’ tax rates are being calculated correctly. By using a sales tax platform you are effectively outsourcing the need to stay on top of the myriad of shifting laws. In fact, as I’m writing this the Supreme Court is considering changing the very foundation of sales tax. Stay tuned!
Which sales tax platform should you use?
In a future post, we’ll outline the pros/cons of each sales tax platform so that you can make a more informed decision on which tool to use. There are multiple sales tax platforms on the market, each with their own strengths and weaknesses.
Some leading sales tax platforms you should check out include:
- Taxjar (ideal for online businesses)
- Sovos Enterprise Sales Tax (ideal for large enterprises)
- Avalara (ideal for businesses of all sizes with deep pockets)
- Taxify by Sovos (ideal for online businesses)