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Strategies to Prevent Overpayment of Sales Tax

Pujun Bhatnagar · December 4, 2023 · 4 min read

Strategies to Prevent Overpayment of Sales Tax
In the aftermath of the Wayfair case, a landmark decision by the Supreme Court, the landscape for online retailers has shifted significantly. The uncertainty of how numerous states would enact Economic Nexus laws and the associated challenges of collecting and remitting sales tax has prompted online retailers to seek clarity. This article delves into the complexities of complying with evolving sales tax regulations, focusing on effective practices to prevent overpayment and maintain compliance.

Accurate Calculation and Remittance of Sales Tax

Amid the proliferation of Economic Nexus laws in various states, the intricate web of distinct tax rates across jurisdictions has created a daunting task for small-scale online retailers to manage and remit sales tax accurately. The inherent risk of overpayment is a recurring concern. To address this challenge, here are practical guidelines to ensure compliance without unnecessary overpayment.

Comprehending Pertinent Sales Tax Exemptions

Although there are common patterns in sales tax exemptions across states, significant variations exist. Establishing a comprehensive process to understand and evaluate exemptions is essential. Companies should grasp the nuances of these exemptions, furnish appropriate exemption certificates to suppliers, and maintain meticulous records for potential future audits. As states intensify their efforts to regain tax revenue lost to online commerce, the likelihood of audits rises, underscoring the need for vigilant compliance.

Evaluation of Current Sales and Use Tax Procedures

To circumvent the inclination to apply taxes indiscriminately rather than assessing exemptions or adherence to state-specific collection requirements, consider the following steps:

  1. Nexus Assessment: Determine your current sales locations and distribution channels. Compile a comprehensive list of states mandating sales tax collection, including instances where third-party platforms facilitate collection.
  2. Filing Criteria: Identify the distinct filing prerequisites applicable in states and municipalities where sales tax collection is mandatory. Varied thresholds dictate annual, quarterly, or monthly filing deadlines, differing by state.
  3. Registration Protocols: Familiarize yourself with the diverse registration processes for sales tax collection. In certain cases, even if collection is executed by third parties such as Amazon or eBay, obtaining and retaining a current sales tax certificate may be obligatory, possibly involving filing zero returns annually.
  4. Exemption Preparedness: If exemptions apply, maintain a repository of required exemption certificates from relevant states. These certificates should be readily accessible to supply to vendors for specific transactions.

Alignment of Internal Operations and Expert Support

Beyond your interactions with state revenue agencies, harmonizing internal procedures is paramount. Conduct a thorough audit of invoicing processes and accounts payable systems to ensure seamless integration with new sales tax obligations. Employing software solutions can aid this endeavor, supplemented by third-party audits to ensure alignment with pertinent regulations.

Collaborating with Experts for Comprehensive Support

Even with competent accounting and legal support, engaging a third-party entity is advisable to ensure compliance and preempt potential Wayfair-related audits. The objective is twofold: to achieve accurate and punctual sales tax reporting and to optimize operational efficiency and profitability. Anticipating forthcoming legislative shifts at both state and federal levels necessitates proactive scrutiny and periodic updates to systems, bolstered by adept software and professional guidance.
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