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Launching a New Product? Avoid These Hidden Tax Traps

What do you have to get right to successfully launch a new product on your ecommerce site? Most people would list things like creating product descriptions, landing pages, and new offers. Yet, surprisingly few people stop to think about the sales tax implications. And that can come back to bite you.

Here are three tax traps for you to avoid when launching the latest product on your site.

Trap #1: sometimes taxable

Most goods businesses sell are taxable in 45 states, plus Washington D.C. If you sell online, you may not have to collect sales tax in some states (though that can change when you launch a new product—we’ll get to that). Each place you do collect sales tax has its own tax rules, which vary from product to product.

Here’s the trap: some products are only taxable some of the time. And if you’re not used to dealing with those products, you can easily make errors in how much tax you charge. For example, New York state doesn't tax clothing and footwear sold for less than $110 per item, but it does tax items sold for $110 or more. Here are some of the most common items that are only taxed some of the time:

  • Apparel and footwear
  • Books
  • Electronics
  • Food
  • Sporting Goods
  • Music and video

How to avoid the trap: see if your new product falls into one of these “sometimes taxable” product groups. If it does, make sure you accurately program the rules into your invoicing software by state. 

Trap #2: surprise nexus in new states

No, nexus is not a disease, though it can be painful. When you do certain activities in a state, like maintain offices or inventory, you have to collect and remit sales tax in that state. That’s called having nexus. Many online retailers don’t have nexus in some of the states where they make sales. But here’s the trap: just selling certain products can give you nexus in some states!

The most common example of this is digital goods and services. For instance, a Texas court recently ruled that a Utah-based company has to collect Texas sales tax because they sell and license software to customers in Texas. http://www.taxrates.com/blog/2014/11/10/texas-nexus-electronic-download-software-digital-content/

The moral of the story is that you could end up with new sales tax obligations overnight when you start selling a digital good or service.

How to avoid the trap: hire an expert to research whether your new offering will create tax obligations for your business. 

Trap #3: resource drain

There’s a good reason that sales tax compliance doesn’t top the “to do” list for companies looking to launch a new product: it doesn’t help grow your business. Even if you take the time to research the tax implications of launching a new product, you will still need to maintain and update your tax rules. You may also need to invest more time in reporting and filing tax to multiple states. This means hours spent on activities that don’t help your bottom line. In other words, sales tax is a prime area for automation.

Just like automation can lead to great marketing results, automation can help with tax as well. Like fewer penalties, lower costs, and less time spent managing tax processes. That’s why more and more companies are turning to sales tax automation solutions, like Avalara for Oracle. Avalara can automatically track rules and rates for you. It can also ensure that you’re returns get filed on time, every time. So when you’re preparing to launch a new product, make sure you have a smart way to handle sales tax—one that gets it right without taking too much time away from growing your business.

Author bio

Will Frei directs social media and blogging for @avalara. He is on a mission to help make sales tax less taxing for businesses of all kinds

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