Taxes are an ongoing part of life. They cause stress and anxiety to almost anyone filing more than a 1040EZ. The pressure of avoiding business tax issues can weigh on new merchants of any kind but can be especially tricky for eCommerce business owners. The larger your audience and further your sales reach, the more difficult tax laws become. And unfortunately, claiming ignorance on tax compliance laws will not keep you out of hot water with the IRS. When push comes to shove, you need to make sure you have the proper files and receipts in order. This will help you avoid an expensive and time-consuming audit. Compliance issues creep up on the unprepared!
To stay on the right side of the IRS, keep an eye out for these 3 common business tax issues.
1. Use Tax
Use taxes are a newly updated set of laws that were designed to minimize unfair competition between sales made in-state and out-of-state. Because they have been updated in recent years, however, you need to make you are up-to-date on all of the use tax expectations. Understanding where, when, and how much you owe will change from region to region.
If your company buys merchandise from another company in your state, sales tax is owed. If you choose to buy goods from an online vendor or outside of your state, use taxes are owed. These laws are also referred to as Consumption of Tangible Personal Property (TPP). Most online sellers are now required to collect sales tax. Your company is directly responsible for tracking, calculating, reporting, and paying all use taxes, making use tax problems one of the most common business tax issues to avoid.
2. Exempt Sales
Certain types of sales transactions do not collect sales tax. State laws govern exempt sales and there are specific requirements to be met if you want to qualify for the exemption certification. These exemptions are typically given based on the type of item being sold, certain characteristics of the buyer, or the use of the goods being sold. For both purchaser-based and use-based exemptions, the buyer is responsible for proving they have an active sales exempt status, which can create hard-to-handle business tax issues. Even if your company doesn’t sell directly to customers, you may still have a responsibility for improperly taxed sales. If you feel you qualify for not collecting sales tax, you must have an Exemption Certificate that shows the state you are exempt.
Business Tax Issues still happen, even when you’re tax exempt!
3. Sourcing Rules
Which sales tax laws apply to your sales? Unfortunately, the answer is not clear-cut and often depends on which state or local government rules apply to an individual sale. Even the simplest of tax laws require great attention when figuring out who has jurisdiction. This makes sourcing rules one of the worst business tax issues to deal with.
Do you tax on point A or point B? These details are usually determined by Origin Sourcing (the location of the vendor) or Destination Sourcing (the location of the buyer) regulations. Origin Sourcing is usually applied to intra-state sales, aka those made where the buyer and seller are in the same state. Destination Sourcing is typically assessed with inter-state sales, and based on the destination address. These guidelines get really complicated when you start dealing with multiple destinations, states or even international sales.
According to the Business Insider, Americans spend $28 billion and 8 billion hours each year, just doing their taxes! And the number of pages in the tax code has increased 16,775% in the past century. Just poke your head into the beginnings of personal vs business tax laws and you’ll figure out why!
If you sell, work, buy or just breathe (it seems), then taxes are a part of your life in some way. Even if you’re simply working to prove that you don’t owe, avoiding business tax issues and an audit can get complicated pretty quickly! One of the best things a business owner can do for their company’s financial security and reputation is stayed ahead of the game with tax automation. This will put the calculating, collecting and remitting of all transactional taxes in the hands of experts, leaving you to enjoy your nights and weekends as you see fit!
What kind of business tax issues have you had to deal with? We’d love to hear your thoughts in the comments below!
Inspired by her love of travel, Susan is a passionate supporter of eCommerce software and the idea that people should own their own internet business (so they can work from anywhere in the world). Though she currently resides in California, she is often found blogging from random beaches and teaching her kindergartner the delightful difference between ‘hola’ and ‘ciao’.
With a strong past in product evaluation, educational content, and eCommerce sales, Susan is serious about helping online merchants succeed in their goals. She loves meeting other independent business owners on the road and hopes to run into you one day… maybe in the hammock next to her!