- Thomson Reuters Tax & Accounting software and research solutions
- Insights | Expert tax & accounting news, analysis, tips, and more
- Sales tax software for small business: How to choose the right solution
Sales tax software for small business: How to choose the right solution
Sales and use tax is more technical than it’s ever been before. Tax jurisdictions around the world are actively leveraging technology to spot tax fraud and buckle down on compliance. As a result, it’s critical that small businesses understand sales and use tax and have a manageable system and sales tax software in place, to make sure their efforts go where they’re best needed—in growing their revenue.
Know the sales tax requirements for your business
For many small business or home-based companies, keeping track of sales tax can be a monumental task. However, before you can fully optimize the way you organize and ultimately pay your sales and use tax, you need to know the requirements for your specific business and begin to map out a solution for paying sales tax and filing tax returns.
Common questions include:
- Does your state have a sales tax? Sales taxes are state-driven. Most states collect taxes on products or services, based on whether your business has a sales tax presence, such as a store front or a home business. Five states – Alaska, Delaware, Montana, New Hampshire, and Oregon – do not collect state sales tax.
- Are your products taxable? The laws on what is a “product or service” are constantly in flux. Certain products are taxable in one state, exempt in another, and reduced rate in depending on the jurisdiction.
- Is your customer exempt? Taxes vary from state to state. However, there are a few consistent products or services that are exempt. These include certain types of food, prescription drugs, and a few other specific products.
- How do I keep track of sales tax rate changes? Managing sales taxes is a challenge. Finding a trusted sales tax software solution to help do the heavy lifting can help keep the focus where it needs to be—on your clients.
- Am I managing sales tax correctly? Once you’ve determined the sales tax rates for your business, the best way to manage sales tax is to invest in processes that will bring expertise and guidance in the places you need it most.
Expanding your business wisely
For many small businesses, growth is an exciting opportunity. However, expansion doesn’t come without questions of how to manage your sales tax burden. As your business grows, being aware of the complexity of your new business, as well as the tax impact to your bottom line, is crucial.
Typical expansion questions include:
- Multistate businesses. If your company conducts business in multiple states (i.e., outside the state of your incorporation), you will need to register your business in those states and determine whether to file for a foreign qualification.
- Adding legal entities. Whether you’re adding an LLC, C corporation, or S corporation, there are significant tax consequences that can flow from each of these entities. Determining how the addition will help your continued growth and operation should be weighed against relevant tax issues, such as reaching a nexus threshold.
- Expanding line of business. Expanding a product line is an important step for small businesses. Including the correct product taxability on an invoice is key not only for customer experience but it can have a direct impact on spend management. It’s essential to investigate these opportunities early, before deciding on a location for expansion.
- Drop shipping. Drop shipping is a useful tool for small businesses. However, questions of nexus, product sourcing, customer location, and the location of the drop shipper can all contribute to sales tax errors.
How the right sales tax software can reduce time and increase efficiency
With the growing complexity of sales and use tax, it’s more important than ever for small businesses to take advantage of software solutions that can make their work more productive. Switching to a comprehensive sales tax solution can help a growing business become more efficient in many ways.
- Assistance managing complex business processes. Business is challenging enough. Spending time untangling complex and changing tax laws is not only a burden; it increases the opportunity for mistakes. Comprehensive tax solutions use the latest technology to not only anticipate challenges but help find a way through.
- Save time and reduce tasks. Not all jobs need a personal touch. Some can – and should – be automated to save you time and reduce the number of tasks you have in a given day. These can include technical support, assistance from an in-house tax team, and various business insights.
- Reduce errors. User errors used to be an inevitable part of running a business. Using a comprehensive tax solution allows business owners to house all their information in one place, allowing that information to be accessible across a variety of applications.
- Better tax planning. Put simply, knowing how much tax you owe can help avoid unhelpful surprises.
- Painful or unfavorable sales tax internal audit. Get tax right with accurate rates and product taxability to avoid surprise over and underpayments in an audit.