In most cases, selling physical products in the United States also means calculating, collecting, reporting, and paying sales tax. If you have multiple stores, operate a delivery service, or ship products to customers, this can quickly become complex due to sales tax requirements at the state, city, special district, and county level. Not only that, frequent tax rate changes at any of these levels can affect how much you must collect.
Basic sales tax collection
Let’s say you run a general store in a small community and that you do not ship items. In this simple case, you’d have to collect sales tax for the state, county, and local municipality. If your store is located in a special city or county tax district, you may have to collect tax for that district as well. You’d also need to keep track of the sales tax collected for each entity and report and pay those taxes on a monthly or quarterly basis. So, that’s three to four agencies, each with its own territory, tax rate, payment schedule, and reporting requirements. In addition to collecting, reporting, and paying sales tax to each applicable tax authority, you’d also need to pay attention to tax rate changes and adjust your collections accordingly.
This is sales tax collection at its most basic, and it’s confusing enough as it is.
How sales tax collection becomes complicated
As you broaden your service area, sales tax management becomes even more complicated. For example, let’s say that you start selling products on the farmer’s market circuit. Each farmer’s market is in a different city, each with its own local sales tax district. Though the county and state may be the same, you now have new local sales tax districts to interact with.
It gets even more complicated when you start shipping products to customers. If you have a presence out of state, such as a warehouse or even a temporary presence such as a trade show, you’ll have do deal with state and local taxes in that state, too. The more you expand, the more difficult it becomes to manage all of these sales tax authorities and their ever-changing sales tax rates.
To further complicate matters, depending on the location, the tax rate could be calculated based on street address, ZIP code, city, or county. It is not uniform.
Just when you think you have it all figured out, the sales tax rates will likely change. Some go up, others go down, others stay the same. For example, in April, Service Objects updated its FastTax product with 125 tax rate changes across 32 counties, 8 county districts, 62 cities, and 23 city districts. Trying to keep up with all of these changes is nearly impossible without software.
The cost of manual sales tax management
Can you manage sales tax collection, reporting, and payment without software? Absolutely, but there are costs involved including:
- Penalties — If you do not collect, report, and pay the correct amount of sales tax, you will likely be responsible for paying the balance as well as penalties and interest. Collecting too much sales tax is problematic, too. If you cannot locate the customer to refund the difference, that extra money is usually property of the state and must be turned over. The potential cost would be the erosion of your customers’ trust in you.
- Time — Does your accounting department have time to contact each tax authority on a monthly or quarterly basis to verify current tax rates? When we update our FastTax software, this becomes an all-consuming task carried out by a team of individuals. Using the wrong tax data will also require time spent on making corrections, reaching out to customers, and issuing refunds.
- Customer service — As a seller, you are placed in the position of being a tax collector. Even though you are not collecting the tax for your benefit, your customers won’t necessarily see it that way. If you collect the wrong sales tax amount and later have to go back and ask for more, your customers will not be happy. If you collect too much and need to issue a refund, they may appreciate the mini windfall but have doubts about buying from you in the future. Your reputation could take a serious hit, especially if a customer has found that you’ve overcharged for sales tax and did nothing to rectify the situation.
Keeping up with ever-changing sales tax rates is essential. Avoid these potential pitfalls by using Service Objects’ FastTax software. This real-time API, which is updated monthly, calculates the correct sales tax rate across all levels (city, state, county, city district, and county district) based on street and address-level tax information. Learn how to save time, money, and your reputation with FastTax by contacting us today.