A Merchant’s Guide to Validating E-Commerce Sales Tax Software

Apr 18, 2024 | E-Commerce, Sales Tax, Software

If you are an e-commerce merchant collecting sales tax, it’s vital to make sure you’re collecting correctly in every step of the chain. 


Sales Tax Software Errors Lead to Double Payment and More

Last year we discovered that a handful of our clients had overpaid sales tax significantly due to software error. These errors were either with their shopping cart platform or with software they used to file and pay sales tax.  

After performing free software reviews for these customers, we found issues falling into two major categories: 

  • Sales tax software errors – Multiple clients who had double paid sales tax due to software settings. One client had overpaid $6,000!
  • Shopping cart configuration errors – Multiple clients were collecting sales tax without being registered with the state. They did this innocently, but collecting with registration is one of the few sales tax sins subject to criminal penalties!

Thankfully, we were able to get our clients who overpaid amended returns and their money credited. And we were able to help our clients who were collecting without filing squared up with the state, no criminal penalties involved. 

Errors at Every Step of the Sales Tax Software Chain

Just recently, after another software review, we discovered that a multichannel e-commerce connector app was causing problems.

This popular e-commerce app integrates marketplace sales (Amazon, Walmart, etc.) with Shopify. The trouble comes from the fact that marketplaces collect and remit sales tax on behalf of their 3rd party sellers, but Shopify does not. 

When we dug into why the client seemed to be overpaying sales tax, we found that the app’s standard settings treated all marketplace sales as Shopify sales instead. 

In other words, sales tax was being collected once but paid twice. In this case, both the marketplace and the merchant were paying sales tax. And merchants using the app were paying sales tax on marketplace sales out of their own pockets. 

This is a great deal for the state. They get double the sales tax on every transaction. But it isn’t so great for merchants, who were collecting and paying sales tax when they didn’t need to. 

Fortunately, we were again able to diagnose the problem and help our clients configure their settings. But we can’t help but wonder how many other software errors are out there causing problems and cutting into bottom lines? 

How to Evaluate a Sales Tax Solution

Right now we’re whacking moles when it comes to sales tax configuration. And while we’re happy to help our clients 1-on-1, we wanted to publish some easily shareable tips to ensure that you’re evaluating every one of your vendors when it comes to sales tax, from your shopping cart, to your multichannel e-commerce apps, to your sales tax software. 

Get Educated on the Basics of Sales Tax

We get it. The whole reason HOST exists is to take sales tax off your plate so you don’t have to learn the ins and outs of nexus and product taxability.  But understanding a few key concepts, like marketplace facilitator laws and when to register for a sales tax permit will help you evaluate any new sales tax vendors, be they new shopping carts or other software. 

Learn more about sales tax here

Read Documentation Carefully 

Software best practices include getting new customers onboarded as quickly as possible. This often means getting you started with the basics, then working out the details later.

But with sales tax, the trouble is in the details. Here are a few things to check in the documenting before implementing new sales tax software:

  1. Am I collecting sales tax in all my nexus states?
  2. Am I collecting sales tax in any states where I’m not registered for a sales tax permit?
  3. Are marketplaces collecting sales tax on my behalf? And if so, am I double collecting on marketplace sales?
  4. Is my software taking product taxability into account? (AKA Grocery items, clothing, digital goods, etc. are non-taxable or taxed at a lower rate in most states. Is your software taking that into account?)

Perform Spot Tests Before & After Implementing New Sales Tax Software

Some software allows you to test out their functionality before implementing it into your workflow. If possible, take this opportunity. Depending on what you are relying on your software for, you might want to test the same four functionality detailed in the “Documentation” section above.

Additionally, we recommend running sales tax reports after you’ve implemented each software.

You can often spot discrepancies if your sales numbers remain steady but your sales tax collected appears to be higher or lower than in other months. If you find this is the case, it’s time to troubleshoot. 

When it comes to sales tax filing and remittance software, like TaxJar or Avalara, you might not notice a discrepancy until your sales tax is actually filed. Again, we recommend keeping a close eye on the filing and comparing it to your previous filing from that same state and period. You can often find discrepancies in this way.

Noticed something off kilter? Need help? Hands Off Sales Tax has your back. Contact us today for a sales tax consultation

Report Concerns

Last but not least, report any concerns. No software is perfect. And sales tax, with its state-level administration and ever changing rules, is an exceptionally complicated use case.

No software is trying to cause problems. If you run into sales tax issues, contact the support team.  

And please let us know here at HOST. After performing a round of free software reviews, we’ve discovered many software issues. Some of these are on the part of the software, some of these are operator error. We’re here to help you and other e-commerce sellers avoid these potential pitfalls. 

Again, if you’ve noticed a discrepancy with your software and your sales tax collection, reporting or filing, get in touch. HOST is here to help.