This sponsored post is produced in association with Avalara.
Your company is growing fast. You’re adding new products, hiring more employees, and expanding into new markets here and abroad. Now you have to figure out what to pay sales tax on — and that can be tricky business.
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The U.S. alone has over 12,000 taxing jurisdictions, and many states, like California, are requiring out-of-state ecommerce companies to collect sales tax for the first time. Companies overseas are looking for new ways to tax on international ecommerce products as well. Let’s take a look at the five areas posing the biggest sales tax risk relating to business growth.
Risk #1. Doing business in new states
You’re headquartered in one state, but selling product in several others. Do you pay sales tax in those other states? Nexus, otherwise known as sufficient physical presence, is a legal term that refers to the requirement for companies doing business in a state to collect and pay sales tax in that state.
But what determines nexus? Before ecommerce, determining physical nexus was straightforward. You either had a brick-and-motor store in that state, or you didn’t. But the advent of companies like Amazon has prompted states to find new ways to collect sales tax from companies that sell goods and services online. Amazon, for example, pays sales tax in 25 U.S. states.
Tax filing requirements become increasingly complex when you have to file returns in multiple states. Adding to that, different states have different rules for determining nexus. Making the determination on your own can be difficult and confusing and can lead to problems.
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You can also join in on the following webinar on reducing tax risk for international expansion on September 30 at 10 a.m. Pacific, 1 p.m. Easter. Register here for free.
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Risk #2. Bringing new products to market
You’ve just introduced a new product. The law says you need to collect sales tax on any product. But what qualifies as a product? It used to be something you could package up and send through the mail. But today, we have software, music, videos, and other digital goods you can buy and sell online.
So, if you’ve just sold someone a collection of bits and bytes, do you have to pay sales tax on that? Are digital products tangible personal property or are they services? Does it make a difference whether your customers download the digital good onto a device they own or simply stream it over the Internet?
Adding to the puzzle, states are inconsistent on how they define and tax digital goods and services. What gets taxed at one rate in one state may be treated entirely differently based on the tax rules in another state.
Risk #3. Going global
When you start selling products overseas, you enter new tax territories as well. The European Union wants to make sure it get its fair share of on sales tax revenue. As a result, the inclusion of a value added tax, or VAT, is coming under the scrutiny of lawmakers in many countries.
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Many countries are looking to find new ways to levy taxes on international ecommerce. You may have noticed some of those changes already. In Argentina, for instance, consumers have to pick up packages ordered online at the customs office — where they’re required to pay any tax due on the spot. No getting around it there. And Internet sellers like Apple and Amazon now have to charge VAT to sales of digital downloads in the U.K. and France.
Every country has its own rules and regulations for VAT, and keeping up with those changes is almost a full-time job in and of itself.
Risk #4. Expanding your workforce
As your business grows, you’ll want to start hiring new employees, both permanent or temporary ones. But here is where you want to be careful. By setting up an office in another state — even if it’s just a remote one-person office — you may be creating nexus, which means you will be responsible for collecting sales tax in that state.
As a side note, smart companies often hire temporary workers to deal with a spike in demand or projected growth. This allows them to increase capacity without committing to fixed costs. To avoid exposure to liabilities, you want to make sure to classify any temporary employee correctly. Avoiding an audit also means filling out all the proper paperwork and submitting it on a timely basis. That means making sure 1099s and W-2s include correct addresses, Social Security numbers, or TINs.
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To avoid errors in the process that might trip up reporting, many companies turn to bulk validation tools supplied by companies like Avalara. This saves them time, money, and the headache of worrying if everything was done correctly.
Risk #5. Failure to upgrade back office systems
Adopting a new enterprise resource planning (ERP) system can be an enormous undertaking, which is why many companies put off doing it. But the fact is, when your back office ERP or shopping cart technology is a dinosaur, you’re taking a chance it may not account for rules and rate changes around tax compliance. Legacy solutions that aren’t cloud-based are particularly vulnerable to this.
A cloud-based ecommerce solution, one that updates automatically, can ensure you have all the functionality and comprehensiveness you need when it comes to managing sales tax risk. You don’t want to be left holding the bag when the auditor comes knocking.
Prosperity is something all companies aim for, but the truth is, the more jurisdictions your company operates in, the more tax rates you have to deal with. Minor mistakes in the sales tax collection can result in tens of thousands of dollars’ worth of fines and penalties. Fortunately for businesses who have to file sales tax, use tax, or VAT returns in multiple jurisdictions, automated systems like Avalara offer a great way to shore up compliance.
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