3 Common Small Business Sales Tax Issues (and Solutions)

Most small business owners aren’t crazy about managing sales tax compliance. Why? Because it can be incredibly complicated!

This is especially true if you’ve never had to deal with collecting sales tax before. Read on to learn about three common small business sales tax issues and how to avoid them.

Sales Tax Mistake #1 - Accidental Noncompliance:

The State Taxing Authority can impose hefty financial penalties if they uncover sales tax compliance issues during an audit. And, unfortunately, it doesn’t matter whether the inaccuracies they discover are accidental or not. So how do you avoid facing penalties?

The bottom line is that sales tax is often complicated with many variables involved. That’s why it’s always a good idea to have a second pair of eyes on your books to make sure you’re reporting information accurately. If you’re a small business owner, consider bringing in a bookkeeper or hiring an affordable sales tax expert to manage all the complexities you don’t have time to worry about.

Sales Tax Mistake #2 - Improper Product or Service Classification:

It can be difficult to determine which products and services should be taxed and what is exempt from taxation. For example, many - but not all - states exempt the following products because they’re considered necessities.

    • Clothing
    • Groceries
    • Medication
    • Gasoline

Things become even more complicated when you set up online stores or point-of-sale systems. Many commerce systems are built to support basic accounting but don’t adequately address sales tax compliance. That’s why it’s important to do your research or enlist outside help when choosing an accounting software for your business. Doing so will help set you up for fully-compliant success.

Sales Tax Mistake #3 - Being Disorganized:

Make sure you’re ready if you ever receive an audit notice from the State Taxing Authority by staying organized throughout the year. Carefully recording transaction details can help you move through the audit process smoothly and with few hiccups. Here’s how you do it:

  • Update your books at least once a month:
    Get a user-friendly, flexible accounting software like QuickBooks Online to simplify the bookkeeping process. Also, never rely on credit card statements or checks -- keep your own current records.
  • Have the following on hand:
    The state auditor will generally request sales invoices, resale certificates, customer purchase orders, sales tax returns, income tax returns, general ledgers, journal vouchers, accounts payable files, and documentation for fixed assets that were purchased and sold. Make sure you have all of these documents on hand and organized by date.

To recap, the key elements of small business success are enlisting help with complex tax issues, being thorough when selecting commerce software, making sure your products and services are appropriately categorized, and staying organized.

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About the Author

Robert Schulte is the founder and CEO of LumaTax - a software company that makes sales tax filing a breeze for busy small business owners. Robert was formerly a Senior Tax Auditor for the State of California as well as the co-founder of Taxcient.