Sales Tax: Fake It till You Make It?

“Fake it till you make it” can be practical advice in some cases. Giving an impression of confidence can see you through till you develop real confidence. Acting like a generous person can make you become more generous. But faking sales tax compliance can get you into trouble.

Collecting sales tax in case

It used to be easy to tell whether or not you had a nexus for sales tax in a given state. If you had a physical presence, like a store or a warehouse, you had nexus. If not, then you probably didn’t.

There were some complicated or gray areas, like trade shows or drop shipping, but in general, you could tell which states expected you to collect sales taxes. Now, with economic nexus, click nexus and cookie nexus, it’s much harder to be sure.

Most states have a threshold for remote sellers. Until you sell a certain amount in a state, you don’t owe sales tax and don’t have to collect or file them. As soon as you sell a certain amount, you must collect, file, and remit. It can be hard to predict, though, especially since some states include all revenue from their state in the threshold, even if most of your sales are tax-exempt.

The “fake it till you make it” solution? Just charge a 10% sales tax on all transactions. Then, if you turn out to be required to comply, you’ve got the money on hand.

We’ve met people who use this rough and ready method, but there’s a problem with it. It’s illegal.

First, it involves charging people taxes when you might not need to. Second, you have to register to collect sales tax — in every single state where you collect it.

For most of our clients, it makes sense to register to collect sales tax in every state where you do business. Otherwise, you can find yourself scrambling to get that done after you learn that you’ll need to collect sales tax. The gap caused by the delay can leave you paying some of your sales tax obligations out of your own pocket.

Not collecting at all

The opposite approach is even more common. That is, just pretend you don’t have nexus anywhere but your home state. Figure as long as you don’t get in trouble, you don’t have to comply.

Unfortunately, by the time you get in trouble, it’s too late to collect the tax. It’s not too late to file or to pay the tax, but it’s too late to collect it from your customers.

Not filing if you don’t owe

You might have to file one year in a given state because you met the threshold. But the following year, you don’t meet the threshold, so you just don’t file. Seems like a sensible workaround, right?

In fact, you still need to file. You may have had some sales and collected some sales tax, and you must remit that. But even if you had no sales at all in that state, you will still need to file. You’ll file showing zero sales.

There’s a whole process for sales tax calculation, reporting, and filing. You can’t skip any parts of the process and expect to get away with it.

It’s complicated

Sales taxes are complicated and confusing, and the rules change frequently. It makes sense to automate your sales tax compliance with highly accurate software solutions like Sales Tax DataLINK. But you may also need to get some expert advice to make sure you are registered and filing in all the places where you need to do so.

That’s why we offer full sales tax services. Call us at 479-715-4275 and let us help with your sales tax compliance.

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