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Top sales tax mistakes for startups

Starting a new business can be overwhelming at times. There are so many small details involved, entrepreneurs can easily forget something important. When that something relates to following state and federal regulations, it can create serious problems.

Sales and use tax compliance creates a unique set of challenges for startups. If you’re launching a startup, understanding these common startup missteps could help you avoid dire mistakes.

Misunderstanding nexus

Today’s startups don’t limit their customer bases to local residents. In fact, even the smallest startup can set up an online shop and sell across state lines. You may work overtime learning your local tax rates and assume that you aren’t required to collect and remit taxes on out-of-state sales. But that's not necessarily true.

When a business has a presence in a state, as defined by tax laws, that business is required to charge sales tax even if items aren't being shipped from that state. This is referred to as nexus, and it can complicate sales tax collection for businesses that cater to customers in multiple states.

If you sell through Amazon using its Fulfillment By Amazon service, sales tax will likely apply at least some of the time, since the company has fulfillment centers in 16 different states. If you have a storefront in a state, representatives work on your behalf in a state, or you regularly sell at trade shows and conferences there, sales tax collection may also become necessary.

Tax rate errors

Many small businesses rely on point-of-sale systems that set up tax rates and apply them across the board. Unfortunately, too much reliance on these systems can lead to problems down the road. Some startups pivot at some point in their development, selling new services or products.

Although sales tax levels generally remain fairly steady, if a business owner tackles a completely new type of product or service, he or she may not realize that sales tax laws apply differently. For instance, some products and services are exempt from sales tax in some states, and a businessperson may not realize that a new item added to the catalog doesn't qualify for those exemptions. Additionally, companies that have multiple locations should also make sure that they have the right rate for all locations. Businesses should regularly review the sales tax rates they’ve set to ensure nothing has changed.

Insufficient resources

Automation is a startup’s best friend, and the good news is that cloud-based solutions are usually affordable to businesses of all sizes. Handling sales tax manually often leads to errors. If a startup is eventually audited, those errors could lead to costly penalties.

The right set of tools will track sales tax rate fluctuations for you, and adjust to meet any changes you make to your business model. These tools will also make it easier to file your taxes and gather your records in the event of an audit, since you’ll have everything in one place.

Startup founders usually do their best to ensure they’re in compliance with sales tax regulations. But keeping up with changing laws when their own business is constantly growing can be difficult. An important part of any small business’s growth is ensuring its own infrastructure can scale along with it. By consistently conducting internal audits to ensure compliance, startup founders can avoid costly errors.

Avalara Author
Stephanie Faris
Avalara Author Stephanie Faris