Following a sale, it’s easy to see money come into your bank account and think of it all as revenue. However, if the sale includes sales tax, it’s not your money; it must be paid back to the state. Innovative businesses budget for sales tax, and yours should, too, because if you don’t, you’re setting yourself up for a painful surprise. In this blog, we will examine how smart businesses budget for sales tax, the consequences of not budgeting, and share some helpful tips.
Understanding Sales Tax for Ecommerce Businesses
Sales tax isn’t optional. If you have sales tax nexus in a state, either physical or economic, then you’re required to collect sales tax on eligible transactions in that state.
To illustrate, a California-based business sells to a customer in New York. They have an economic nexus in New York; therefore, they are required to collect sales tax. Thus, a $100 product can result in a $107 charge to the customer. But only $100 belongs to the business. The $7 in tax must be held and later remitted to the New York Department of Revenue.
Sales tax is a liability, not a revenue; a business collects it on behalf of the state. Treating it like your own money, even on a short-term basis, can lead to problems.
Physical Nexus & Economic Nexus
Sales tax nexus refers to the legal connection between your business and a state. It’s what determines if you must collect and remit sales tax there.
Physical nexus is when you have a physical presence in a state, such as a storefront, warehouse, or office. Even a single employee in a state represents a physical nexus.
Economic Nexus is reached if your sales in a given state reach the online state sales tax collection threshold. Most states set the threshold at $100,000 in sales or 200 transactions, but it varies by state. Once that threshold is crossed, you’ll be legally required to register, collect, and remit sales tax in that state.
How Smart Businesses Get it Right
Innovative businesses treat sales tax as ‘pass-through money’, not revenue. They:
- Segregate it
- Track it
- Budget it
This prevents the funds from being lost in a bank account or spent on other business operations. Some businesses with large volumes may even set up additional bank accounts to hold and monitor funds that need to be paid back to the states in sales tax. This becomes particularly important when a business operates in multiple states and experiences rapid growth.
By handling sales tax with the same importance and seriousness as payroll and rent, innovative businesses avoid the mismanagement of sales tax funds and protect long-term financial health.
A Common Pitfall
Many small or fast-growing ecommerce businesses collect sales tax correctly but fail to set it aside, instead using it for everyday operations, such as inventory, payroll, and advertising. When it comes to a filing at the end of a month or quarter, they can end up short and don’t have the cash to pay the state for their collected sales tax. This can be particularly problematic in some of the more heavily populated states, such as California, Florida, and New York, where a business might have large sales volumes and file quarterly or even annually, meaning there can be significantly more sales to be paid back to the state.
Consequences of Poor Sales Tax Budgeting
There can be several consequences to poor sales tax budgeting, including:
- Late filing penalties and interest on the late filings
- Potential audits from missed or late filing periods
- Cash flow disruption
- Business stress
- Reputational damage with customers and suppliers
In worst-case scenarios, this can lead to a business being unable to operate legally in certain states, such as the suspension or revocation of a sales tax license or account due to missed or frequently late sales tax filing returns.
How to Budget for Sales Tax
Here are some tips to help your business budget for sales tax:
- Open a dedicated bank account and transfer tax amounts regularly
- Use accounting software and ecommerce platform tools to track sales tax by state
- Work with a CPA or tax professional to monitor your sales tax
- Know your deadlines and plan for monthly, quarterly, or annual sales tax filings
Conclusion
Sales tax shouldn’t be a surprise; it’s a certainty. While collecting is straightforward, managing it requires more discipline.
Innovative businesses budget for sales tax because they know it’s not revenue and it’s not optional. By planning properly and treating sales tax as a liability, you can help avoid unpleasant surprises, maintain a healthy cash flow, and build a more resilient and stronger e-commerce business. Budget for sales tax now, and your future self will thank you.
Need help with sales tax budgeting and remitting sales tax to the states?
RJM Tax Exemption offers a variety of sales tax compliance services, including free sales tax nexus assessments and sales tax filing returns. You can reach out to us or visit our website www.rjmtaxexemption.com.
