Managing sales tax compliance can be tricky, especially for the growing and ever-changing world of digital businesses and SaaS products. Tax rates and policies are being constantly updated, so it is extremely important for businesses to be up to date to make sure they are tax compliant.
How much time do you spend on ensuring your company is tax compliant? The more your business grows, the more time it seems to cost you to manage your company’s sale tax.
To help you save time, here are a few main steps you can follow to get your sales tax right and save your business from costly mistakes.
1. Determine your tax nexus
The term “nexus” in tax laws is used to describe the connection between the taxing authority and the tax-paying entity when a business has a tax presence in a specific state.
Historically, a business has a nexus in a state when it is physically in the state one way or another. However, it is now determined more loosely. A business may have sales tax nexus in a state when:
It has a physical address in the state.
It has property within the state (intangible property is included).
It has employees working and residing in the state.
It has employees who solicit business in the state on a regular basis.
It has employees who solicit business in the state on a regular basis.
In whichever location that your business has nexus, you are required by law to properly register with the local tax authority to collect and remit sales tax, as well as file tax returns. For example, a company with nexus in Chicago must register with the Illinois Department of Revenue.
Many state laws have an exception for small businesses, but it can get tricky. Companies must carefully track sales in each state they do business in as every state has a different nexus threshold. In Illinois, the threshold is $100,000 in sales and 200 transactions, while it is successively $500,000 and 100 in New York.
2. Lawfully register with tax authorities
When you have determined your sales tax nexus, the next step is to properly register with the local tax authority. It is up to the state whether the process is simple or complicated.
To help you with this process, here is a detailed, state-by-state guide provided by Avalara, a top tax automation software. In this guide, you can find out whether your company needs a sales tax permit, how to get one and how much it would cost to get it specifically by state.
3. Calculate the correct tax rate
As each state has its own regulations on tax eligibility for SaaS products, we’ve helped you outline a list of states and their sales taxes rules for SaaS. You can click on each state to look at specific sales tax regulations of that state:
>> View How taxes work for SaaS in the U.S.
Tax rates can vary in the same state depending on whether your SaaS product is for business or personal use. For example, in Connecticut, SaaS for personal use is taxed at full rate in the state, while SaaS for business use is taxed at only 1%.
Exempt transactions
If your small SaaS business is eligible for sales tax exemption, you still have to register, validate exemption and file returns, even when no sales tax was collected. To validate exempt transaction, you need an exemption or resale certificate. Be sure to keep these certificates up to date.
4. Monitor Changes
As all tax rates and regulations are subject to change, it is crucial that you monitor any changes. Keep an eye out to make sure your business is always compliant, as state tax authorities are typically not required to notify businesses of changes. Therefore, if anything faulty happens in the process, it is your responsibility to deal with.
We understand this is a hassle, and that’s why we are here. With a tax automation software, changes in tax rates or regulations are automatically updated and applied. You can rest assured that without fault, your business always follows through with tax compliance. Let us show you how you can make this transformation.
5. Remember to file returns and remit tax
Even if your business does not have tax to remit, you are still required to file tax returns in every state where you have nexus. Filing returns is normally a lengthy, complicated and painful process.
Tax Compliance with Ease
How much time and effort are you willing to devote to this lengthy, complicated, and painful process? Put all the manual work aside and have a look into the tax automation process. Talk to us today to find out what software would save you the most time and money.
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