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Tax Reporting & Compliance: Cautionary Tales

Tax reporting and compliance cautionary tales for small businesses.

It is an exciting time to be a small business owner. The world of online retailing has opened up new markets that were once inaccessible to companies without the infrastructure of retail giants. In addition, new fulfillment methods offered by services such as Amazon drop shipping mean that small businesses can deliver their products at speeds that were once unheard of.

However, these new opportunities come with new tax responsibilities. This is even more important since the passage of the Wayfair ruling, which has imposed new requirements on businesses to collect sales taxes in every state in which their products are sold. The real kicker: tax laws are different in every state. It’s a lot to keep up with, but failure to comply to the new laws can have disastrous results.

Risks of Failing to Comply with New Tax Regulations

One if the trickiest elements of the Wayfair ruling is that it can create an economic nexus where it may not have existed before. To see the impact these new tax regulations can have on a business, let’s review the now infamous case of Mattress World.

Mattress World was a retailer based in the sales tax-free state of Oregon. The company unknowingly created an economic nexus when it hired a third-party company to deliver and install a mattress for a customer in next door Washington state, which does have a sales tax. When a nexus is established in another state, the company is required to register with the state and begin reporting taxes – which Mattress World never did.

Over time, the company accrued over two million dollars in unpaid taxes, interest charges and penalties before the state brought it to their attention. While Mattress World scrambled to pay the back taxes, the damage was done, and the company closed soon after the crisis.

New Legislation Makes Shipping More Complex

The Wayfair ruling’s new regulations on online shipping means that oversights such as this will be encountered in much more often the future. Sales taxes can be imposed on businesses through the establishment of many new types of economic thresholds such as a click though nexus, a marketplace nexus or an affiliate nexus. If you retail items online, you need to understand the distinction between these terms and how each one is relevant to your business.

While ensuring compliance with the general guidelines established by Wayfair is a start, business owners also need to be aware that specific rules can vary from region to region. Different states have their own regulations and those regulations can have specific stipulations that are different in each county.

Prepare Your Business for New Tax Regulations

The burden of proving that you either do not owe sales tax or are in full compliance with all local regulations will be on you if your business ever comes under scrutiny, so you need to be prepared.

It’s imperative for retail businesses, both internet-based and brick and mortar stores, to keep up with changing legislation in all states that they do business. The Wayfair ruling has already encouraged legislation change in 30 states, with many more on the way. It doesn’t matter whether you understand the rules or not, failure to comply can result in serious consequences for businesses of all sizes. Just ask Mattress World.

Download our free guide to learn how to keep your business compliant with new sales tax obligations.

Learn about the Wayfair ruling and how it impacts your small business taxes.