These Strategies will save you from your sales tax headaches and ensure you don’t have to worry about any penalties and interest from the scary state government sales tax offices! They are coming!
Hey guys, Alan Chen, CPA, here.
We always get very panicky questions from our clients this time of the year about tax preparation and compliance topics, so we thought it might be a good idea to share some knowledge and sales tax planning strategies to maximize your sales tax savings and avoid unnecessary tax penalties and interest.
If you are watching this video, I assume you have an excellent basic understanding of sales tax and nexus, so I won’t go too deep there. Still, if you need a refresher, check out our video, “How Do I Handle Sales Tax as a 7-Figure eCommerce Business Owner?” for a refresher on those topics.
First of all, I want to emphasize these points:
1. Don’t Panic! For most of you guys, you won’t have to worry about sales tax registration in every or even in most states.
2. Even if you do forget one, it’s ok! Most states will understand if the small business owners are very forthcoming about their tax situation, and a call from your CPA/Accountant can smooth many things over on your behalf.
Now for the Top 3 Sales Tax Planning Tips for an excellent sales tax season!
1. Along with Point A above, don’t worry too much when you start noticing you start to have a lot of customers all over the place. Most States have set thresholds before they start coming after you. For example:
-California: Sales Tax Threshold is $500,000 and requires immediate registration if you cross this figure.
-Kentucky: Sales Tax Threshold is $100,000 or 200 transactions, whichever happens first
-Mississippi: Sales tax threshold is $250,000
-Nevada: Sales tax threshold is $100,000 or 200 transactions; Nevada requires a small business to register to collect and remit Nevada sales tax starting on the first day of the first calendar month that begins at least 30 days after it crosses the economic nexus threshold.
-New York- $500,000 AND 100 transactions
You can do plenty of intelligent planning around this area once you understand the threshold of every State to ensure that you could sometimes defer your sales tax payment until a future year to give you more cash flow flexibility now to invest in your business or yourself.
Something essential to educate yourself on or seek professional help in.
Action Item- Don’t panic if you are starting; make sure to watch for the threshold for each State
2. Think about the State you are living in: Are you living in a high Sales and local state tax right now, such as California (8.66% +) or Tennessee (9.53%)?
With how physical nexus works right now, the state you live in, you will 100% need to REGISTER for a sales tax permit as that is the most accessible State to get in trouble with.
But also think about how, since you run an online business and how much tax savings it would be if you could move your headquarters to a lower sales tax state like Wisconsin (~5%) or Wyoming (~5%), even better, a STATE WITH NO SALES TAX (Two options that come to mind are Oregon and Montana even with their pros/cons to evaluate).
Action Item- Look to strategically move around your online business to states that offer better sales tax protection for your nexus planning
1. Make sure you or a hired professional can perform a sales tax anomaly report and a customer concentration report each year or even better per quarter. This way, you will have an outstanding awareness of…
2. How your revenue mix is what area of the United States is the majority of your sales, and where perhaps you should centralize your attention toward
3. It gives you incredible visibility on when your sales tax will trigger certain revenue levels and thresholds from those states. This critical study will involve just the customer’s shipping address. But on a more in-depth level, it could also be traced to the location of their IP address, if the item was a gift, where to allocate that revenue, and if there is affiliate income involved.
The last point is worth emphasizing if you agree with another business and collect a fee or affiliate income; certain states, like California, would consider that as evidence of “nexus”, which could trigger a need for sales tax registration in that State.
Action Item – Hire or plan out your sale tax strategy ahead of time so you can realize incredible tax savings at year-end as your business grows into the 7 figure range and beyond!
I hope this helps get your mind moving in the right direction as you consider where your business is and whether you should handle this yourself or seek professional help.