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Correcting Sales Tax Mistakes: A Guide for Businesses

Pujun Bhatnagar · October 6, 2023 · 5 min read

Correcting Sales Tax Mistakes: A Guide for Businesses

Businesses, operated by humans, are susceptible to errors. When these errors involve the miscalculation of sales tax, they can lead to financial losses, damage the company's reputation, and invite the scrutiny of the affected state. According to the law, any income resulting from such errors must not be retained by the vendor, regardless of its magnitude.

So, how can vendors ensure error-free transactions? What steps can they take to rectify these mistakes, and how can they safeguard against future occurrences? The following guidelines are invaluable for ecommerce shops:

Verify for Sales Tax Errors Before Filing

Facing penalties for improper filing can be far more troublesome than making the initial error. One should never assume that every transaction has been processed correctly. Given the recent changes in sales tax regulations at both state and local levels, errors are more likely to happen than ever before. Identifying these issues before tax filing deadlines expire can spare a company from a multitude of fines and penalties.

**Familiarize Yourself with **Sales Tax Laws and Changes

As previously discussed, online vendors require the guidance of an experienced professional to navigate the labyrinth of state and local sales tax laws, including staying updated on regulatory alterations. This encompasses not only nexus laws but also aspects like applicable sales tax exemption criteria and the latest resale certifications.

Utilize Sales Tax Software to Detect and Prevent Errors Early

It is prudent to employ a system capable of detecting and flagging errors in advance. A proficient tax consultant like Accurate Tax can assist vendors in selecting the software that aligns best with their needs and configuring it to ensure the correct automation of sales tax processes.

Address Errors Swiftly

If a company identifies that it has overcharged a customer's sales tax, the best course of action is prompt resolution. Issuing a refund to the customer and subsequently filing for a refund with the relevant state is a wise move. Avoiding the problem can tarnish a company's reputation and result in lost business. Furthermore, it may lead to additional penalties, fees, and even an audit. Conversely, refunding a customer, even if it involves additional costs, fosters trust in the brand and can establish a small company as a reputable vendor.

File Early

Businesses can set themselves up for success by filing early to allow ample preparation time. This includes assembling all supporting documentation, submitting the correct forms to the relevant states, and meticulously documenting errors.

Prepare for Audits

Lately, states facing budget shortfalls have intensified their scrutiny of sales tax errors to recoup lost revenues. Companies that uncover errors should be well-prepared for this process, with thorough documentation, certifications, and updated software procedures.

Sales tax regulations remain exceedingly intricate and demand diligence. Forward-thinking companies will invest the time to ensure compliance at every level and will implement software capable of averting errors before they escalate into more significant issues.

1. Incorrect Tax Rates

Applying incorrect sales tax rates is a frequent error. Rates can vary widely by jurisdiction and change over time. Using outdated or incorrect rates can result in undercharging or overcharging sales tax.

2. Filing Late

Missing filing deadlines is another common mistake. Late filings can result in penalties and interest charges. It's crucial to keep track of when returns are due, as these dates can differ by state and local tax authority.

3. Poor Record Keeping

Inadequate documentation of transactions, tax collected, and exemptions can create significant problems during tax filing. Accurate and detailed records are essential for correct tax filing and are also crucial in the event of an audit.

4. Neglecting to File for “No Sales”

Some businesses mistakenly believe that if they did not make any taxable sales in a period, they don't need to file a return. Most jurisdictions require filing a return even if no sales tax was collected, often referred to as a "zero return."

5. Not Collecting Exemption Certificates

When sales are exempt from tax, such as sales for resale or to a non-profit, it is necessary to collect and keep valid exemption certificates. Failing to do so can result in the business being liable for the unpaid sales tax.

6. Overlooking Nexus in Other States

A business must collect sales tax in states where it has a nexus, which can be established by physical presence, economic activity, or other factors. Not recognizing or understanding nexus can lead to non-compliance.

7. Mixing Up Sales Tax and Use Tax

Confusing sales tax with use tax is a common issue. Use tax applies to the use, storage, or consumption of items in a state when sales tax has not been paid. Businesses need to manage and report these taxes separately.

8. Miscalculating Taxable and Non-taxable Items

Not all items are taxable, and the rules vary by location. Misclassifying items as taxable or non-taxable can result in incorrect sales tax calculations.

9. Using the Wrong Filing Frequency

States assign filing frequencies based on the amount of sales tax a business collects. Filing at the wrong frequency (e.g., monthly instead of quarterly) can lead to missed deadlines and penalties.

10. Handling Multistate Transactions Incorrectly

For businesses operating in multiple states, it's important to apply the correct tax rules based on the location of the buyer. Multistate transactions can be complex, involving different tax rates and rules.

Ready to automate your sales tax? Request a demo and see your company's complete 50-state nexus obligations populate in real time in a matter of minutes. Try the Kintsugi Nexus Calculator for free – you won't even need your credit card.

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