How to Avoid Common Sales Tax Mistakes in Seattle, Washington
If you sell taxable goods or services in Washington State or if your business has economic nexus in the state, you must collect and remit sales tax and file sales tax returns.
Failure to be compliant can lead to penalties, interest, and unwanted collection actions. If the DOR believes your failure is a willful attempt to evade taxes, you can even face criminal charges.
The sales tax requirements can be complicated, and to protect your business, you should avoid these common mistakes. To get help now, contact us at Seattle Legal Services. We can help you deal with the DOR for sales tax as well as all other business taxes.
Sales Tax in Seattle and Washington State: An Overview
The sales tax rate in Washington State is 6.5%, but city, county, and regional taxes are added to this amount. In Seattle, the sales tax rate is 10.25% which includes the following:
- 6.5% Washington State sales tax,
- 2.35% City of Seattle and King County sales tax, and
- 1.4% Regional Transit Authority sales tax
If you sell taxable goods or services in Seattle, you must collect these taxes from your customers and remit them to the state along with a sales tax return. For example, if you sell a taxable item for $100, you must charge your customer $110.25 and then, you must report the sale and pay the $10.25 sales tax.
Although your business collects sales tax for multiple entities, you pay all of it to the Washington Department of Revenue (DOR). The DOR oversees the collection of sales tax throughout the state, and it publishes a list of the current sales tax rates in various areas of Washington.
Common Sales Tax Mistakes to Avoid
On paper, sales tax rules look fairly straightforward, but in reality, it can be hard to be compliant especially if you’re dealing with multiple sales tax jurisdictions, confusing nexus rules, exempt products, or other factors. Here are some common mistakes to avoid.
Calculating Local Sales Tax Correctly
If you do not know the correct sales tax rate, you may overcharge your customers for sales tax, or you may collect less than required and face personal liability for the uncollected sales tax. Be sure that you understand the correct sales tax rate for your locality and know how to assess it accurately.
Failing to Update Rates
Also, be aware that the rates may change quarterly. For example, in Seattle, the sales tax rate in the first quarter of 2024 was 3.75%, but it increased to 3.85% in the second quarter of the year.
Check the DOR’s updated rates quarterly to ensure you’re assessing the correct amount of sales tax on your sales. Or use software that updates automatically as the rates change.
Not Collecting for Online Sales with Economic Nexus
Prior to 2020, online sellers did not have to collect sales tax from customers based in Washington State. Effective 2020, however, online businesses must register for a sales tax account if they are over the economic nexus threshold for Washington State.
If you are a remote seller or a marketplace facilitator with over $100,000 in sales to Washington-based customers during the year, you must collect sales tax starting the next month that is at least 30 days after the sale and for the following calendar year.
Failure to report and remit sales tax can lead to penalties of up to 39% of the tax liability if you are not registered. The DOR also adds interest to unpaid liabilities.
Not Understanding Specific Rules Affecting Seattle Businesses
Generally, all retail sales of personal property and certain services are subject to sales tax in Seattle, but there are exceptions and exemptions. Several items are exempt from sales tax in Washington State including farm products, producer goods, interstate sales, public activities, health-related purchases, deferrals and credits, and several other items and services.
The rules are incredibly detailed, and if you are unsure of when to apply sales tax or if your business even needs to collect sales tax, you should reach out to a tax attorney.
In Seattle and throughout the rest of the state, there is no sales tax on groceries, but there is a sales tax on prepared food, soft drinks, and dietary supplements. For example, a bag of potatoes is not subject to sales tax, but a bowl of potato soup is. However, there are exceptions and nuances to this rule.
Businesses such as restaurants where prepared foods are more than 75% of their total sales must charge sales tax on everything. Thus, a grocery store may sell a bag of chips without assessing sales tax, but if a restaurant serves a bag of chips with a sandwich, it must charge sales tax on both items.
If a business has less than 75% of its sales as prepared foods, then, it can sell certain prepared foods including bakery items without charging sales tax, but only if the food is only cut or repackaged by the seller, sold in an unheated state by weight or volume, or raw foods that require cooking. The seller also cannot provide utensils to the buyer.
This rule can get complicated. For example, if a grocery store has a deli where it makes soup from scratch and serves the soup hot with spoons available, it may need to assess sales tax. However, if a grocery store repackages soup and sells it cold without utensils, it may not be subject to sales tax.
If your business is near the state border and you deliver prepared food to people in other states, you generally don’t have to assess WA sales tax. You also don’t have to assess sales tax on prepared food served to non-profit organizations during fundraising activities, if the organization provides you with a reseller certificate.
Many services are subject to sales tax including construction, landscaping, retail recreation services, personal services, and miscellaneous services such as car washes, catering, and vehicle towing. However, several other types of services that arguably overlap with these categories are not subject to sales tax. For example, if you trim trees near power lines or provide janitorial services, you don’t have to assess sales tax.
Making Sales Tax Recordkeeping Mistakes
You need accurate records to complete your sales tax returns correctly. Mistakes can get you on the DOR’s radar and you may be selected for an audit. Then, if you don’t have the right records to back up the claims on your tax return, the auditor may adjust your return to show a tax liability and apply the associated penalties.
In addition to tracking your taxable sales, you must also track your exempt sales. If you fail to track these sales accurately, you may end up remitting more sales tax than you actually collected. Alternatively, if you claim exempt sales but don’t have the records to back them up, you may lose those deductions when you get audited.
Filing Late or Making Mistakes
As indicated above, poor recordkeeping can lead to mistakes on your sales tax return and make it more likely that you will not be able to pass a sales tax audit.
Additionally, you need to be very careful about the deadlines. If you are even just a day late, you will incur a 9% late payment penalty. This increases to 19% when you’re a month late and 29% when you’re two months late. However, you can get penalty abatement if you file late due to reasonable cause or if you only incur one late payment in a 24-month period.
Getting Confused About B&O Tax
Businesses in Seattle and the rest of Washington face a business and occupation tax on their gross receipts. You must pay this tax on your gross sales with no regard to deductions for labor, materials, or other business expenses.
The rate varies based on your business. For example, retailers face a .471% B&O tax, while service and other activities with $1 million or more in gross receipts in the prior year face a 1.75% B&O tax. There are also special rates for extracting timber, travel agents, slaughtering meat, processing dried peas, and several other activities.
You will report this tax on the same excise return that you report your sales tax. Keep in mind that your gross receipts will vary from your taxable sales if you sell exempt or non-taxable goods or services in addition to taxable items.
How to Avoid Sales Tax Mistakes
So how do you keep your Seattle business on track? How do you ensure that you’re meeting your tax collection, reporting, and payment obligations? Keep these tips in mind:
- Use sales tax software for accuracy – Most point-of-sale or e-commerce software will calculate the sales tax rate automatically based on the location of the sale or the location of the delivery depending on which applies in the situation. Plan to spend more if you’re dealing with multiple sales tax jurisdictions or several different states.
- Automate filing or set reminders to file on time – Some software will file your sales tax returns automatically. You simply connect the software to the DOR, and it does everything you need. Some programs will even link to your POS and put the collected sales tax into a savings account until it’s time to remit it. Then, you don’t have to worry about a big monthly or quarterly payment.
- Consult with a tax attorney – An experienced tax professional can help you with every aspect of this process from determining which items are taxable, to setting up a sales tax account, to filing sales tax returns. They can also provide audit representation if needed.
The most effective way to avoid sales tax mistakes is to ensure you understand the rules, use software to help with accuracy, and consult a tax professional as needed.
Help With WA Sales Tax
Sales tax rules are complicated, and with over a 10% rate in Seattle, businesses need to be careful. You must understand which items and services are taxable and which are exempt. You must have recordkeeping processes in place and be able to file and pay your returns on time.
Are you dealing with these common mistakes? Have general questions about sales tax? Facing an audit? If you’ve answered yes to any of these questions, contact us today at Seattle Legal Services.