Online sales are great for many businesses. They provide an expanded opportunity to connect with more customers without the need for a physical location (and accompanying overhead) everywhere you’re targeting prospects.
For many companies, not having a brick-and-mortar location in a sales area used to mean they didn’t have to worry about collecting sales tax in those states. That meant less paperwork and less hassle from collecting and remitting sales tax, like companies have to do for sales made in states where they have a physical presence.
But in June 2018, a ruling from the U.S. Supreme Court paved the way for a change that will allow states to change how they handle that exemption. Two years later, many small business owners still find the adjustment challenging. What does this mean for your business?
South Dakota v. Wayfair
Based on a law approved by South Dakota’s legislature in 2016, South Dakota was set to begin collecting sales taxes for remote sellers doing business within the state. The remote seller tax applies to businesses with more than $100,000 in gross sales in the state during a calendar year or with 200 or more transactions in South Dakota during a calendar year. Its sales tax collection regulations for businesses with locations within the state remained unchanged.
But the roots of the issue go back much further to 1992, where in Quill Corp v. North Dakota, the Supreme Court ruled that because of the Dormant Commerce Clause in the Commerce Clause of the U.S. Constitution, states couldn’t collect sales taxes on resident-based purchases if the vendor was out-of-state and didn’t have a presence in that state.
But in June 2018, a 5-4 Supreme Court majority in South Dakota vs. Wayfair overturned that decision, saying states could, in fact, charge sales taxes on purchases made by residents from out-of-state sellers, even those without a “nexus” or physical connection to the state.
Since that June 2018 ruling, many states have followed South Dakota and now collect sales taxes on remote sales. By January 2020, 43 of 45 states that collect statewide sales taxes now collect sales taxes for remote sellers, too.
Many states use South Dakota’s policy as a foundation for their requirements, often pinpointing specific sales volume levels or transaction numbers as the starting point for sales tax collections. For specific requirements for the states where you do business, check with the state department of revenue to find out what that means for your company and what you need to do to collect and remit that taxes.
So Many Taxes, Not Enough Time
If you’re a company that does online sales in multiple states, the paperwork and processes for each state’s collection and remittance requirements can be daunting – especially if you’re a small or medium-sized business. How do you keep up?
First, if you’re using an ecommerce system for online sales that doesn’t communicate with your other core operational systems (for instance, billing and accounting), then it’s time for a new solution — one that can save you time, money, and hassle, no matter how fast or how far your sales grow across the nation.
Sound too good to be true? Not if you’re using business management software to fuel your business. Here are a few examples of how you can use business management software to break down data silos and help you quickly collect and remit those state sales (and other) taxes.
Tax Profiles for Every State
Your business management solution should come out-of-the-box with an option to set up a tax profile for every state where you do business. Have multiple jurisdictions within that state with varying tax requirements? You can create profiles for them right in the solution, too.
In a business management solution like aACE, once you get those tax profiles created, you can have confidence that your rates are always up-to-date, even if you don’t have the time to do the research yourself. In aACE, an integration with Avalara AvaTax uses geolocation to ensure your rates are correct every time you make an online sale. So, for example, let’s say you do business today in a state that doesn’t collect remote seller sales taxes but a month from now that tax change is implemented. Because AvaTax automatically keeps up with rate changes, the system will automatically include those charges when they’re effective and when a customer makes a purchase in that jurisdiction.
Talks to Your CRM
We mentioned earlier how important it is to break down data silos and share critical business data within your operating systems. To make your sales tax reporting easier, your business management software should work hand-in-hand with your customer relationship management solution. By integrating your CRM with your tax management solution, your customer’s contact information (for example, the zip code from the purchase shipping address) can automatically determine your customer’s location and apply the appropriate tax rate for you. If anything in that purchase is exempt from the state’s tax requirement, the system knows that, too, and will not add sales tax to those items.
Purchasing Made Easy
Because all of your core systems talk to one another and share relevant data in near real-time, you can ensure that when your team (or your system) creates an invoice for a purchase, it always has the right information to collect the correct amount of taxes, making invoice creation easy and accurate. No more worries about under- or over-collecting fees. A business management solution like aACE can even give you insight on that sales tax collection breakdown. For example, it can quickly estimate state and local taxes and you can see how much was collected for each respective entity.
Under-paying taxes can come with penalties, while overpaying means you’re taking needed dollars and handing them over to the government when they can be used for day-to-day essentials to grow and scale your business. With an integrated business management software solution, you can always get instant insight into how much tax you’ve collected from each jurisdiction so you can prepare to remit those taxes — accurately and on time — when they’re due.
Tax Exempt? No Problem
Not all of your customers may have to pay sales tax. Some, like nonprofits, are tax exempt. In those cases, when you set up new customers in your CRM and other shared databases you can indicate tax-exempt status and attach the tax-exempt certificate to the client record. When that customer makes a purchase, the system identifies the tax-exempt status and handles it appropriately for you.
Automation Saves the Day
Now, think about the examples we’ve shared and then imagine trying to do those same processes manually or by importing and exporting data from one system to another. How much time would that take? How many resources would that tie up? How many chances are there for costly errors? If you’re ready to automate your sales tax collections so they’re less taxing on your business, now is the time for business management software that can handle these steps for you.
Would you like to take a deeper dive into how aACE streamlines these tax collection processes? Check out our feature highlight on sales tax collection in aACE or join us for an upcoming webinar.