The Highlights
- Common mistakes include overlooking economic nexus thresholds, filing incomplete returns, and missing physical nexus triggers.
- To fix past filing mistakes, start by conducting a thorough review and using VDA programs to minimize liabilities.
- Timely action can help you avoid mounting interest and hefty penalties.
The complexities of multi-state taxes, especially for ecommerce store owners handling compliance on their own, are such that occasional mistakes become inevitable. Compliance gaps abound, and factors like rapid expansion or changing economic nexus rules can lead to unfiled returns and even overlooked registrations in multiple states.
These issues may remain hidden for a while, but they always come back to bite in the form of heavy penalties and fees. Find out how to fix those mistakes before they become penalties with this sales tax guide.
Common Ecommerce Tax Mistakes
There are a couple of huge mistakes that ecommerce store owners tend to make when trying to stay compliant without expert guidance.
Failing To Register After Crossing Nexus Thresholds
Proper sales tax registration is the very foundation of compliance, and yet it’s all too easy to mess up if you’re not sure what to look for.
States across the U.S. (with the exception of the NOMAD states) are free to set their own economic nexus thresholds. These are typically based on sales volume ($100,000 in gross sales) and/or transaction counts (200 annual transactions).
A common ecommerce tax mistake is to assume that these nexus triggers are uniform across different states. It’s entirely possible for a business to do $150,000 and $250,000 in two different states and have a nexus in both of them.
Not Collecting Tax Where a Physical Nexus is Established
Sales tax filing mistakes are incredibly easy to make if you’re overlooking certain physical nexus triggers, such as:
- Maintaining a warehouse in different states
- Holding a trade event booth in a different state
- Maintaining remote employees or working with fulfillment centers spread out across the U.S.
Something as simple as working with Amazon FBA to store your products in warehouses can establish a physical nexus.
Submitting Incomplete/Inaccurate Returns
Possibly the most frequent ecommerce tax mistake is the submission of inaccurate returns. To be fair, this is also the hardest part of the compliance process.
Tax rates can change all the time, and it’s all too easy to note down the wrong tax rate if local jurisdictions impose their own rules.
To make matters even more challenging, business owners need to classify product taxability correctly. For example, a digital product like an e-book might be taxed as tangible property in one state (such as Alabama), but not in another.
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How To Fix Ecommerce Tax Mistakes
Conduct an Exposure Review
Ideally, the first step towards resolving past liabilities should be to conduct a thorough exposure review, so you can find out what the damage is and what other sales tax filing mistakes need to be addressed.
Start by compiling sales reports by ship-to state to identify economic and physical nexus triggers that might be in play. If your ecommerce business has crossed thresholds in a state, look for registration dates that should have applied. Your ecommerce platform (Shopify, Amazon, etc.) will do the heavy lifting here by generating automated sales reports.
Calculate Accurate Liability
This is the hard part. To rectify ecommerce tax mistakes, you’ll need to determine the tax that should have been collected and remitted while accounting for sales tax exemptions and other product-specific rules.
We strongly recommend working with a trusted sales tax expert to ensure accuracy across varying state definitions and to avoid further mistakes that may lead to cascading penalties.
Look for VDA Programs
Most states with sales tax systems provide a Voluntary Disclosure Agreement (VDA) program that allows businesses to voluntarily report unpaid/underreported liabilities.
In exchange, the state typically allows for a limited look-back period and waives most penalties, provided you can pay the due tax (plus interest).
VDAs can be incredibly helpful in fixing ecommerce tax mistakes, since they’re usually available year-round and protect disclosed periods from future audits.
Prepare and Submit Applications
To fix sales tax filing mistakes, you’ll need to complete state-specific forms that detail the period and amount involved. Submission is now largely online, and you should get a response with a formal agreement within a few weeks.
Complete Payment/Filing
Once you’ve submitted the right forms, you’ll need to remit the agreed-upon tax+interest and then file for amended returns. You may even be able to leverage payment plans in certain jurisdictions if your ecommerce tax mistake involves a larger amount.
Get Professional Tax Assistance
Rectifying past mistakes can be a long, time-consuming, and challenging process for business owners managing multi-state operations. The experts at RJM Tax Exemption can handle everything from assessment to filing and keep your business compliant with ongoing support. Find out how we can help with a free consultation today!
Frequently Asked Questions
What are the most common ecommerce tax mistakes made by businesses?
The most frequent mistakes are failing to register after crossing nexus thresholds, overlooking physical nexus created by employees/fulfillment centers, and filing incomplete returns.
How can I tell if I have past sales tax liabilities?
If you have not received a notice yet, you can identify past liabilities by reviewing your historical sales report on a state-by-state basis. Look for dates where you should have registered against actual registration dates.
What are the risks of ignoring sales tax filing mistakes?
Failing to address unresolved liabilities can lead to monthly interest and hefty penalties, such as 25% or more of the tax due. The earlier you can address ecommerce tax mistakes, the better.
