?? Day 32 of #100DaysofTaxes: Sales Tax—The Hidden Risk That Can Cripple Your Business ??
Alexander Roytenberg, CPA
Founder / CPA at CPA in Stealth Mode - Tax and Accounting Professional helping companies and individuals navigate the complex world of taxes to save money
Sales tax might seem simple—you collect it from customers and send it to the government, right? Not so fast.
Sales tax compliance is one of the most complex, frequently changing, and heavily audited areas of taxation. A single mistake—like using the wrong tax rate or missing a filing deadline—can lead to penalties, interest, and audits that stretch back years.
Even small businesses and startups that operate online or across state lines can get caught in the web of economic nexus, exemption rules, and shifting tax rates.
Let’s break down why sales tax compliance is so risky, where businesses make mistakes, and how you can avoid costly audits.
?? Sales Tax Is a Moving Target (And a Huge Compliance Burden)
Unlike federal taxes, sales tax is a state and local issue, meaning that rates, exemptions, and filing requirements are different everywhere—and they change constantly.
Example: Effective March 1, 2025, the combined state and local sales tax rate in Suffolk County, NY will increase from 8?% to 8?%.
That might seem like a small change, but if your system isn’t updated, you could:
?? Undercharge customers → Leading to unexpected tax liabilities during an audit.
?? Overcharge customers → Leading to compliance headaches and unhappy clients.
?? Fail to remit correctly → Resulting in penalties and interest.
Sales tax errors compound over time—and states aggressively audit businesses to recover lost revenue.
?? Key Risks That Lead to Costly Sales Tax Audits
?? Charging the Wrong Rate – Different states, counties, and even cities have different sales tax rates. Selling online? Your customers' location determines the rate, not yours!
?? Failing to Register in the Right States – If you sell in multiple states, economic nexus laws might require you to register and collect tax in states where you have no physical presence. (Wayfair v. South Dakota changed the game!)
?? Ignoring Exemption Rules – Some customers (like resellers and non-profits) are tax-exempt. But if you don’t have valid exemption certificates on file, you’re responsible for the unpaid tax!
?? Misclassifying Products & Services – Some states tax services, others don’t. Some tax digital products, others exempt them. If you misclassify what you sell, you could be charging (or paying) the wrong tax.
?? Forgetting About Use Tax – If you buy goods or services from out of state and don’t pay sales tax, you might owe use tax. Many businesses get caught in audits for failing to report this.
?? Late or Incorrect Filings – Some states require monthly, others quarterly or annual filings. Missing deadlines leads to automatic penalties and interest.
?? How to Stay Sales Tax Compliant (and Avoid Getting Audited!)
? Regularly Update Your Tax Rates – Sales tax rates change often. Automate updates to prevent errors.
? Track Where You Have Nexus – If you sell across state lines, you may be required to collect tax in multiple states.
? Collect & Store Exemption Certificates – If you sell to tax-exempt customers, always get and store proper documentation.
? Use Sales Tax Automation Software – Tools like Taxwire.com can automate calculations and filings to prevent errors.
? File On Time, Every Time – Set reminders for filing deadlines to avoid penalties.
?? The Bottom Line: Sales Tax Is Not Your Money—Don't Risk It!
Unlike income tax, sales tax is collected on behalf of the state. Failing to remit correctly means you’re personally liable for the unpaid tax, penalties, and interest.
?? Auditors specifically look for businesses that:
?? Operate in multiple states but aren’t collecting sales tax everywhere they should.
?? Sell taxable items but misclassify them as exempt.
?? Don’t keep exemption certificates properly documented.
?? Buy goods out of state and fail to report use tax.
? Stay proactive. Stay compliant. Stay out of trouble.
?? Has your business faced sales tax challenges? Drop your experiences in the comments! ??
#SalesTax #TaxCompliance #SmallBusiness #100DaysofTaxes
So much to keep track of when it comes to sales tax. This is a great overview ??