If you’re a small business or e-commerce company, every product you sell could possibly be taxed differently. Accurately calculating sales tax involves thousands of nuances across product and service categories, and these tax rates also vary from state to state or by country. Staying compliant with all of these varying tax laws can cause headaches for small business owners who also need to run the day-to-day operations of their business, especially as sales pick up during the holiday season.
Small businesses, especially those that operate in the retail space, often don’t have the personnel or financial resources to dedicate an individual or team to tax filing. Limited resources, coupled with the less-than-opportune timing of the holiday season, can put real stress on a business. With the holiday season shopping rush hitting soon, here are some tips that will help small business owners overcome the challenges that sales tax could cause this holiday season.
Understand your remote tax obligations
The 2018 South Dakota v. Wayfair Supreme Court ruling made it necessary to apply sales tax to the online sales made in states by sellers who may not have a physical presence, or nexus, where the purchase was made. In light of this decision, it’s important that businesses speak to their tax professionals about which states they meet the remote seller sales threshold in. These “thresholds” can come in the form of either a monetary value (for example, $100,000 of sales in that state in a given year) or a minimum amount of transactions made in that state. Because these statutes vary so widely between states, employing the help of a tax expert can be the difference between compliance and headaches for you and your business.
For many businesses that sell online, the holiday season is the busiest and most profitable time of year. However, increased sales around the holiday season may also mean that businesses that hadn’t formerly triggered sales tax nexus in a given state may now unknowingly surpass that state’s sales threshold. Several states are also expanding the definition of nexus to include activities like employing remote staff, a practice that is extremely prevalent during the hustle and bustle of the holidays.
Prepare for cross-border complexities
Cross-border e-commerce sales is forecasted to reach $1 trillion in sales by 2020. The drastic increase in cross-border sales is being driven by the power of the consumer to purchase products from virtually any business, anywhere in the world. While this shift in consumer preferences has opened up new markets for businesses of all sizes, it’s important that businesses selling internationally this holiday season understand the compliance and shipping nuances for each country.
To illustrate just how complex cross-border selling can be let’s take a look at flip-flop sandals. If a flip-flop-style sandal is made of rubber, there is a duty rate of 9 percent in the United States and 16 percent in Canada that applies. But if you’re selling leather flip-flops, both countries change their rate — in Canada, it goes up to 18 percent, and in the U.S., the product is now duty-free.
The complexity of cross-border selling isn’t confined to the burden of the added cost that tariffs bring with them but extends to how products are defined by each country. Businesses selling internationally must be able to map each of their product SKUs to Harmonized Commodity Description and Coding System (HS) and tariff codes in every country that they have nexus in. Even for businesses with a small product catalog, the process of mapping each product to each country’s HS code would be a nearly impossible feat, especially during the busyness of the holidays.
Stay compliant and save time with technology
In order to stay compliant this holiday season, small businesses should also consider solutions that can free up human and technological resources for other critical business needs. Thanks to the rapid evolution of technology in the past couple of decades, it’s no secret that automation can help businesses make their processes more efficient and lower costs, and sales tax collection is no exception. Many companies now offer automation services that not only help businesses to determine whether they meet specific remote seller thresholds but also automatically collect and pay sales taxes in states in which this threshold is met and send them to the appropriate authorities. These solutions are designed to easily integrate into a business’s existing point-of-sale and online platforms to ensure accurate invoices without disrupting the customer shopping experience.
Holiday season shopping always conjures images of mad dashes for the hottest toys and long lines at checkout and gift wrap counters. But in the age of e-commerce, small businesses preparing for holiday season success must consider far more than just stocking and staffing up. Dedicating some forethought to the arduous process of collecting and remitting sales tax for online purchases can be the difference between a successful holiday sales season and disappointing revenue in the last quarter of the calendar year.
Liz Armbruester is the SVP of Global Compliance Operations at Avalara.