Tips for Navigating Multi-Jurisdictional Tax Challenges
If your business engages in e-commerce, you’re likely aware of the complex sales tax requirements that accompany online transactions, especially if you conduct business across multiple jurisdictions. Navigating these complexities can be even more challenging if you integrate an e-commerce platform, such as Shopify, with modern enterprise resource planning (ERP) systems, such as QuickBooks, Sage Intacct, NetSuite, etc.
If you struggle to balance operational efficiency and accuracy with sales tax compliance, the following tips can help streamline your processes.
#1 – Automate sales tax calculations.
Sales tax rates vary significantly based on both product type and location and may include state, county, city and special district taxes. Automating your sales tax calculations can help ensure accuracy and reduce the manual effort required to calculate, collect, remit and file sales tax liabilities. Be sure to:
- Use your e-commerce platform to process sales and integrate a dedicated sales and use tax application to enhance the accuracy and timeliness of your sales tax calculations.
- Connect a sales-and-use tax application to your ERP system using either direct integration or an application programming interface (API). Doing so can help you better manage end-to-end compliance.
- Use real-time tax rate updates to help ensure compliance with ever-changing tax laws.
#2 – Monitor nexus obligations.
Some states have sales tax obligations for businesses that exceed certain thresholds for sales, transactions or revenue generated in the state. Referred to as “nexus obligations,” these thresholds can vary widely by state and are subject to change, which is why it’s important to consistently monitor compliance with changing requirements related to:
- Physical presence – If you have a physical location within a state, such as an office, retail store, warehouse, fulfillment center or home-based employees, you may be subject to sales tax. Tax liabilities can also be triggered by certain activities performed within a state, such as installing or repairing goods at a customer’s location or soliciting orders from residents of a state. Even a temporary physical presence, such as attending a trade show, can sometimes create nexus.
- Economic activity – Some states enforce economic nexus laws that establish a sales or transaction threshold that, when exceeded, create nexus. For example, a state may impose economic nexus if a business generates more than $100,000 in sales or 200 transactions within the state.
- Affiliate presence – Somes states have affiliate nexus rules that create a sales tax obligation if a business has affiliates or other related entities operating within the state.
- Click-through activity – Some states have click-through nexus rules, though these are less common than they used to be. These rules can create nexus for businesses that have in-state affiliates that refer customers to the business through website links.
- Market facilitators – Businesses that sell through a marketplace facilitator, such as Amazon or Etsy, may not be deemed a “seller” for sales tax purposes in certain states. However, it’s important to continually monitor the marketplace facilitator laws as they apply to your business.
The following tips can help you monitor your company’s ongoing nexus obligations:
- Use your ERP to regularly review state-specific nexus thresholds.
- Work with a tax advisor to remain up to date on changing nexus rules and thresholds.
- Use an e-commerce platform to generate tax reports, monitor geographic activity and assess nexus risks.
#3 – Properly configure product taxability.
Not all products are taxed the same way. Some products are tax-exempt, and some are taxed at reduced rates or only under certain conditions. In order to maximize tax efficiencies, it’s important to understand and properly apply the tax exposure of your various products. Be sure to:
- Work with a tax advisor to help ensure the accuracy of your product tax codes.
- Use your ERP to map product categories to make sure the correct taxability rules apply.
- Regularly update your product tax codes when expanding your inventory or entering new markets.
#4 – Leverage integration to help ensure seamless reporting.
Managing separate systems can lead to reporting discrepancies that complicate both the tax filing and audit processes. Taking steps to integrate your reporting can increase efficiencies and result in fewer errors. Be sure to:
- Consolidate financial and tax data by connecting your e-commerce application and ERP.
- Establish automated workflows to create tax-related data synchronization between various systems.
- Regularly audit all reports to help ensure accuracy in calculations and e-commerce sales data.
#5 – Manage tax-exempt transactions.
Certain customers or transactions may be exempt from sales tax. For example, government entities and nonprofits may qualify for sales tax exemptions. To avoid unnecessary tax liabilities, it’s important to maintain proper documentation of tax-exempt transactions. Be sure to:
- Use your e-commerce platform to collect, validate and maintain tax-exemption certificates.
- Make sure your tax system is set up to automatically exclude taxes from tax-exempt transactions.
#6 – Plan for multi-state filings.
Tax filing requirements can vary significantly by state. It’s important to plan for variations in tax filing frequencies, forms, deadlines, etc., as failing to adhere to each state’s requirements may result in penalties. Be sure to:
- Generate state-specific tax liability reports using your sales tax software.
- Automatically file sales tax returns or generate pre-filled forms using your tax application.
- Maintain a calendar of filing deadlines for all jurisdictions where you have nexus.
#7 – Remain up to date on tax laws.
Sales tax laws are constantly evolving. Failing to keep up with changing regulations could expose your business to higher tax liabilities and potential penalties, which is why it’s important to consistently monitor tax laws across all states in which you conduct business. Be sure to:
- Work with a tax advisor who has experience navigating ever-evolving tax laws and their impact on businesses.
- Subscribe to tax bulletins from states in which your business operates.
- Follow industry blogs, webinars and tax compliance trend updates.
#8 – Plan for international sales (if applicable).
If you sell your goods internationally, you likely face additional tax complexities related to value-added tax (VAT), goods and services tax (GST) and customs duties. To avoid an unexpected tax bill, it’s important to plan for these liabilities in advance. Be sure to:
- Enable international tax settings within your e-commerce software to account for basic VAT and GST capabilities.
- Enable international tax modules within your tax software to help ensure compliance with international tax requirements.
- Configure your ERP to allow for multi-currency and multi-jurisdiction reporting.
Could you use help navigating the complexities you face as an e-commerce business owner? Creative Planning Business Services is here for you. Our experienced professionals help business owners simplify their state and local tax filings by providing specialized support services to help ensure processes remain in compliance with changing tax laws. To learn more, schedule a call with a member of our team.
