Many states are in a state of budget deficit and are looking for ways to fill that gap in the shortest time possible. They are searching really hard for new income source, and many of them may be on their way to finding one in the form of owed sales taxes to them – plus fees. They are creating means to get their monies in, such as the Nexus survey, and are on the prowl to collect on every dollar. That said, I have seen many small business owners who are disconnected from their bookkeeping/financial/taxes aspect of their businesses, which has left collected sales tax unnoticed and the filing requirements unmet. Some are also aware of their sales tax responsibility, but have taken it less seriously than other taxes such as payroll taxes. As with any tax requirements, there are fines associated with non-compliance, and you want to avoid those fines at all cost.
What is Nexus?
Nexus is a connection that a business has with a state, and it has to do with a form of presence. In the sales tax world, you owe sales tax to a state if you have nexus in that state and you are selling taxable items. The scary part for small businesses is what makes up nexus. See SBA’s contributor Caron Beesley “Sales Tax 101 for Small Business Owners and Online Retailers” for more sales tax/Nexus information. It is your responsibility to know if you are required to collect and file sales tax, and the correct way to go about it, such as filing for a sales tax permit prior to collecting sales tax.
It is advisable to keep a separate account for sales tax collected, and not include it with your income as it is not income but monies you collect on behalf of the relevant states, to subsequently turn over to them. If you have a bookkeeping and accounting software system setup for your business, this can make it very easy for you to setup an account so that that portion of monies received can be transported to that account, where it will be noticeable on the balance sheet as a payable and therefore owing by you.
Taxable in One State but Not in Another
Sales tax, like many other taxes, can be complicated and there are gray areas that are difficult to sort through. According to Caron, “As a general rule, if your business has a physical presence in a state – nexus, whether it’s a store, warehouse, office, employees or other criteria established by your state, then you must collect sales tax from customers in that state. If you do not have a physical presence in a state, then you are not required to collect sales taxes.”
Minimizing Sales Tax Audit Risk
You may receive a form that looks like a survey and asks innocent-looking questions such as: how many employees do you have? And, what state do they work in? The surveys do not look like they are from a state government but they may very well be. It is their way of getting you to admit nexus. Do not complete any of the surveys; it could expose you to a huge liability. It is always best to get a sales tax professional involved to help you determine the taxability of your items as well as to interpret nexus. Many states are hiring auditors and aggressively pursuing businesses, so due diligence in this area is prudent.
Get a grip on your sales tax and avoid getting blindsided
In an effort to combat holes in their budgets, many states are working to collect on monies owing to them, from all sources, by whatever means necessary. Sales tax is one such source of helping to fill that gap in budget, and so if you have collected sales tax on their behalf and have not paid it over, you need to do so at your earliest convenience to avoid hefty fines and fees. If you have not been collecting sales taxes, but should have been, get your paperwork in order and start doing so as quickly as possible.
If you need help getting a grip on your sales tax, there are many bookkeeping and accounting companies – like ourselves who are equipped with the knowledge and technical know-how to get your sales taxes under control. If you have not already done so, get a system setup where you can effectively track your collected sales tax, and pay attention to your sales tax filing. Reach out for the help you need, and avoid unnecessary penalties.