Intuit states that the ‘Automatic Sales Tax’ (QB AST) in QuickBooks Online “takes the guesswork out of collecting sales tax1.” But, “Can it actually manage your ‘nexus’ compliance?”
Let’s not forget that much of the ‘how QuickBooks Online (QB AST) calculates sales tax’ directly depends on the user setting it up properly. That means the user must understand how QB AST works, the setup process and everything there is to know about ‘Sales Tax’ for every jurisdiction where Nexus applies.
The proper setup is critical for e-commerce businesses, as most of their transactions are being sold or shipped to locations out of state. For these businesses, the complexity of varying sales tax regulations across different states is compounded by the evolving nature of Economic Nexus laws.
Let’s ensure we are all on the same page regarding ‘Sales Tax Nexus.’
While physical Nexus—having a physical presence in a state—may seem simple, economic Nexus can pose substantial risks. Economic Nexus refers to the requirement to collect and remit sales tax based on the volume of sales or the dollar amount of transactions in a particular state without regard to the physical presence of the business in that state.
We will return to how e-commerce businesses can prepare themselves and their sales tax collections in light of Economic Nexus requirements. However, before we do, let’s look at a few examples of how the QB AST setup might result in sales tax non-compliance by an e-commerce business.
Customers and Sub-customers – QuickBooks allows you to exempt a customer from sales tax and specify a reason under the customer’s ‘Additional info’; however, some customers may have tax-exempt status for some sales and be non-exempt for other sales. Further, unless you use sub-customers to track sales to a customer in any alternative jurisdiction, you could be missing out on tracking Nexus-related sales in another state where ‘economic Nexus’ might apply. Intuit even recommends that QuickBooks users talk to their accountant if they sell out of state1.
Service or Product Tax Category – QuickBooks lets you assign tax categories to anything you sell, noting that the rules for taxing a product can change from state to state or even city to city. Once again, Intuit says, “If you’re not sure which tax category to assign, ask your accountant2.”
Selling or Shipping Location – While QuickBooks keeps tracking the sales tax rates (state, county, city, special district, etc.) based on the zip code on your sales transaction, the problem arises when a sale is shipped to a different address than the customer’s address. Many states require sales tax based on the location to which taxable products are shipped; however, some states require sales tax based on the customer’s address when shipped to an alternative address. Economic Nexus could apply to shipments made to out-of-state locations even when the customer resides in your state. Once again, if in doubt, Intuit suggests asking your accountant.
The problem with the proper setup of QB AST is that it requires ‘too many calls to your accountant’ who may have no more information to answer your questions than you do. Accountants, at least smaller local ones, are not ‘sales tax’ experts unless they have just decided they will specialize in sales tax problems. In those cases, they are likely not to be an accountant you regularly turn to for your ‘accounting work.’ Certainly, if you use a ‘large’ accounting firm for your regular accounting work, that firm may have a ‘sales tax expert’ on staff somewhere within its overall structure.
This points to the fact that QB AST is more of a ‘mechanized’ sales tax tool than a truly ‘automated’ sales tax solution. Still, it can do the job in most instances if you have the information to set it up correctly and maintain the proper setup for the customer, product, and location aspects of sales tax calculation.
The question then becomes, “How do you do that?”
Since any U.S. business, regardless of its state of domicile, may be subject to sales tax obligations if it meets the Economic Nexus thresholds set by any (and all) other states, understanding the various state nexus laws and knowing how to register is essential.
Determining Economic Nexus can be complicated for businesses, especially small e-commerce businesses. That’s one reason your e-commerce business should consider Avalara’s FREE Sales Tax Risk Assessment, which will help you identify where your e-commerce sales have triggered economic (as well as physical) Nexus.
Did you know that Economic Nexus can be triggered by as little as $100,000 worth of sales or making 200 individual transactions in some states?
Economic Nexus thresholds vary from state to state and are changing almost every legislative year to garner more tax income from non-resident businesses doing business via e-commerce.
In addition to understanding state-specific regulations, e-commerce businesses must maintain accurate sales records to file timely sales tax returns. This is where QuickBooks can come in if you have tracked the sales to the appropriate jurisdiction.
Sure, you can take the time to research each state you are doing business in, then compare your sales and determine if you think economic Nexus applies. Still, chances are, by the time you get it all figured out, something will have changed in one of the states you previously researched.
That means that something in the QuickBooks Automatic Sales Tax setup needs to be changed to conform to the changes for those states where you do business.
Failure to comply with Nexus requirements can result in hefty tax penalties for your business. Why risk potential non-compliance when there are free tools to help you assess your sales tax risk?
If your free assessment identifies problems, you may want to take that information to your accountant, find an accountant or ProAdvisor specializing in QuickBooks automated sales tax configuration, or consult the folks at Avalara to develop a game plan regarding compliance.
Footnotes and Disclosures:
1 – Intuit: Learn how QuickBooks Online calculates sales tax. QuickBooks Help, 9/3/2024.
2 – Intuit: Add a sales tax category to products and services in QuickBooks Online. QuickBooks Help, 9/3/2024.
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