How Designers Can Handle Sales Tax Without Losing Their Minds
There are no two ways around it: sales tax is a huge PITA. It’s one of the biggest frustrations for interior designers and a challenge I discuss at least a few times a week. I’d love to decode it for you in this blog post, but because of the variables of location, items, tax jurisdiction and much more, it’s almost impossible.
The tips below are designed to help you understand the basics of sales tax so you can sidestep some common mistakes.
Sales tax tip #1: Location is everything when it comes to sales tax.
Sales tax is typically determined by the jurisdiction in which your business is located. The connection between your business and your state is called “nexus.”
The most basic formula to calculate sales tax with nexus is:
Your business + the state you’re located in = nexus
Nexus = the % of sales tax your business charges and collects
So, physical location is the most common way to determine nexus and calculate sales tax. That said, other factors can have an impact on nexus and, as such, sales tax. Those factors include:
- Delivery and distribution of goods
- Employee and/or other office location
- Other locations where you spend your time (for instance, if your clients have summer houses in the Hamptons that you travel to frequently.)
- Online advertising
- If you moved and forgot to change your business address
In short, determining sales tax is complicated. Which leads me to the second-best way to wrangle sales tax…
Sales tax tip #2: Don’t go it alone.
Navigating sales tax alone is never a good idea. Your CPA should be a wealth of knowledge about sales tax and a great resource to help you stay on the right side of the tax laws and your clients. This isn’t always the case.
Many traditional CPAs are generalists. They work with clients in various industries and have a great overall sense of the tax rules and regulations for each. As generalists, though, it’s nearly impossible to keep up with constantly changing sales tax information for each of the (wait for it) 10,000 sales tax jurisdictions in the United States. Oh, and that information? It’s far from stagnant. In fact, there are typically 5,000 changes to the tax code every year.
Picture this… you’ve decided to take an Alaskan cruise with your best friend. You have the chance to select the captain who will navigate the ship from among the three below. Who would you choose?
- Sally “Alaska” Allen… a captain with a storied history of cruising throughout the Gulf of Alaska. She’s navigated large ships hundreds of times through the Shelikof Strait to show passengers the gorgeous natural wildlife of Alaska’s Kodiak Island.
- Cara “Cruisin” Smith… a captain with a long history of cruising, but who only navigated this particular route once, five years ago
- James “General” Jones… a marine captain recently promoted to cruise ship captain, who is piloting the ship for the first time
If I had my choice, I’d choose Sally. There’s nothing wrong with Cara, it’s just that she’s not nearly as experienced with the route and its nuances. If we get into a hairy situation, I’d trust Sally to have the knowledge to get us out. Think of Sally as a CPA who specializes in interior design clients. She’s got an in-depth knowledge of what you need to know to profit and stay on the right side of Uncle Sam. Cara is a traditional CPA who focuses on every type of client and has a basic knowledge of each. James? Well, James works at a chain tax firm. He’s a green accountant, more focused on checking Facebook than trying to save your money.
When it comes to the interior design business, it’s crucial that you get sales tax right. Choose a CPA based on their track record of success with interior designers – one who’s a wealth of knowledge about sales tax. Not only will this keep your business above-board when it comes to Uncle Sam, it will help you regain hours that you’d spend figuring it out or fixing it if you’ve made an error.
Sales tax tip #3: Find an accountant who works with your software.
Here’s a situation I hear about often from interior designers:
“My business manager does my bookkeeping. I have a firm out in Illinois that helps with Design Manager. My CPA does my taxes, but he doesn’t really understand my business.”
That is a hefty waste of time and money. As a business owner and a successful interior designer, you owe it to yourself and your clients not to tolerate this level of inefficiency. Imagine how much you could save if you streamlined these tasks.
Here’s how to regain control:
- Keep your business manager, as they presumably fulfill other functions in addition to bookkeeping. They can continue doing your bookkeeping and you won’t have to worry about the time it takes to get it ready for your CPA.
- Use cloud-based interior design software, such as Design Manager, Ivy or Studio Webware, that helps you understand the basics of sales tax. (Don’t conform to your CPA’s software of choice just because they say you must
- Find a CPA who understands your software.
- Consult your CPA whenever you have a sales tax question before you make a costly mistake or waste hours figuring out how to make it work in your software.
- Use your CPA as a business mentor, profitability coach, tax accountant, sales tax expert and virtual on-call support.
The bottom line… sales tax is complicated.
You’ll save money by removing one layer of support. Saving money is a good thing, but you can always save money and make more. One thing you can save or make? Time.
The time you’ll save by working with an accountant who understands your business, works in your particular software and knows how to help you reach your goals is the biggest benefit you can reap.
#Freethedesigner isn’t just a snazzy hashtag (but it is pretty snazzy, isn’t it?), it’s our mission –giving you back precious time to create or just enjoy the things you love to do.