Square Sales Tax Compliance: Avoiding Costly Mistakes

Sarah’s boutique collected sales tax through Square for three years. When she expanded from Texas to California and Arizona, she configured the tax rates and watched Square calculate tax at checkout.

Then came the audit notice. California wanted $15,000 in penalties and interest for taxes she had collected but never remitted.

Sarah’s story is not unique. Many sellers assume that collecting sales tax through Square means their compliance obligations are covered. In reality, automation at checkout is only the beginning.

By the end of this guide, you will know exactly what Square’s sales tax tools automate, where your responsibilities begin, and how to avoid costly mistakes as your business grows.

What Square actually does (and does not do) for sales tax

Square automates calculation and collection at checkout, but every other ecommerce sales tax compliance step is your responsibility.

Square’s sales tax features are designed to make checkout seamless. The platform automatically looks up tax rates based on the shipping address for online orders or your business location for in-person sales.

Once you set up tax rates and assign them to locations, Square applies the correct rate, calculates the amount, and adds it to the customer’s total. You can also configure custom tax rules and exemptions as needed.

Square provides basic tax reports that break down taxable and non-taxable sales by location and time period. These reports can be exported to help you prepare your tax returns.

However, Square’s automation stops at collection and reporting. The platform does not:

• Register your business with state or local tax authorities
• Monitor your sales for economic nexus thresholds in new states
• File sales tax returns on your behalf
• Remit collected tax payments to government agencies
• Track multi-state or international VAT/GST obligations

Here is a breakdown:

Table 1: Square handles vs. you handle

Scenario: If you open a new location in another state, Square will collect the local tax if you configure it. However, you must register with that state’s tax authority, file returns, and remit payments yourself.

Many sellers assume Square’s automation covers more than it actually does, leading to costly misconceptions.

3 costly myths that get Square sellers audited

Believing Square “handles it all” is a recipe for audit risk and unexpected penalties.

Myth 1: Square files and remits my taxes automatically

Many sellers believe that if Square collects tax, it must also file returns and remit payments.

In reality, Square is a payment processor, not a tax filing service. You are responsible for registering, filing, and remitting ecommerce sales tax in every state where you have nexus. Failing to do so can result in penalties and interest that often exceed the original tax owed.

Myth 2: My Square reports are always audit-ready

Square’s reports show what was collected, not necessarily what you owe. Refunds, partial payments, bundled orders, and marketplace fees can create discrepancies.

Relying solely on Square’s reports without reconciling them against your accounting records can lead to mismatches.

Myth 3: If Square collects tax, I do not need to register in new states

Collecting tax without registering is illegal in most states. When you make sales into a new state, you are subject to that state’s tax laws and must register before collecting tax.

Square will collect tax if you add a rate, but it does not handle registration or monitor your sales for economic nexus. Many sellers only realize these gaps when reconciling sales tax across channels or during an audit.

Understanding these myths is the first step. Next, let us ensure your Square setup is accurate from day one.

Suggested read: Best Ecommerce Sales Tax Software

Configuring Square for accurate sales tax collection

Accurate setup is your first defense against compliance headaches.

To set up sales tax in Square:

1. Add tax rates for each state, city, or district where you have nexus.
2. Assign each rate to the appropriate business location or sales channel.
3. Customize settings for in-person, online, or delivery sales as needed.
4. Review and update your tax settings whenever you expand to new states, add channels, or change your product mix.

Setup review checklist:

• Confirm all business locations and online channels are listed in Square
• Add and assign the correct tax rates for each jurisdiction
• Review custom rules for product exemptions or special rates
• Update settings after any business expansion or change

Even with a perfect setup, Square’s automation covers only part of the compliance picture. Your ongoing responsibilities go further.

Your compliance roadmap: The seller’s monthly checklist

Your compliance does not end at collection. Here is what you must do every month.

Monthly sales tax checklist:

• Register for permits in each state and jurisdiction where you have nexus
• Monitor sales and transaction thresholds to track new nexus obligations
• File sales tax returns and remit payments on time in every required state
• Reconcile the collected tax in Square with your accounting records
• Keep organized documentation for audits (including exemption certificates, nexus tracking, and reconciliation reports)

If you sell on Square POS and Shopify in three states, you must reconcile tax collected across both platforms and file ecommerce tax returns in each jurisdiction.

Reconciling sales tax across channels and accounting software is tedious and error-prone, but automation tools like Webgility can save up to 90% of reconciliation time and reduce costly mistakes.

Of all these steps, reconciliation is where most sellers struggle. Let us break down why it is so challenging.

Suggested read: Nexus Rules by State: Stay Compliant

Why reconciliation is harder than it looks (and how to fix it)

Manual reconciliation is slow, risky, and unsustainable as you scale. Accounting automation eliminates errors and frees up your time.

When you sell on Square POS, Shopify, and Amazon, each platform collects tax, but settlements, refunds, and adjustments rarely match up one-to-one. Common pitfalls include:

• Mismatched settlements between platforms and accounting records
• Partial refunds or adjustments not reflected in all systems
• Timing differences between sales, payouts, and tax reporting
• Missed adjustments for discounts, returns, or bundled orders

Manual reconciliation can take hours each month and increases the risk of errors that trigger audits.

Webgility connects Square, your ecommerce stores, and accounting software to automate reconciliation. This eliminates spreadsheets and catching discrepancies before they become audit issues.

Whether you reconcile manually or automate, following best practices keeps you audit-ready.

Best practices for managing sales tax with Square

Regular reconciliation, documentation, and ecommerce automation are your best defenses against compliance risk.

Best practices:

• Set a regular cadence for reviewing and reconciling sales tax reports (monthly or after each payout)
• Update tax settings as your business grows or adds locations
• Keep organized documentation, including exemption certificates and reconciliation reports, for fast audit response
• Automate syncing and reconciliation wherever possible

Syncing Square tax reports into your accounting software with Webgility ensures your books are always up to date and audit-ready.

But how do you know when it is time to move beyond manual processes? Let us break down the triggers.

Know when you have outgrown Square’s basics (and what to do next)

As your business adds channels, states, or order volume, automation and expert support become essential.

Complexity tiers:

Table 2: Tier-wise breakdown

Triggers that signal you have outgrown Square’s basics:

• Selling in multiple states or countries
• Managing more than two sales channels
• Handling 100+ orders per month
• Needing to reconcile across platforms and accounting systems

When evaluating automation tools, look for:

• Real-time sync between Square, ecommerce platforms, and accounting software
• Multi-channel support and SKU-level accuracy
• Comprehensive audit trails and documentation
• Official integrations with QuickBooks, Xero, and NetSuite

Webgility bridges the gap between Square and your accounting system, automating sales tax reconciliation, syncing data in real time, and supporting multi-channel complexity. Its integration with Avalara offers advanced tax management for growing businesses.

See how Webgility keeps your books audit-ready as you grow. Schedule a demo today.

Frequently asked questions (FAQs)

Does Square remit taxes for me?

No. Square calculates and collects sales tax at checkout, but you are responsible for filing returns and remitting payments to tax authorities.

How do I access and export sales tax data from Square?

You can export detailed sales tax reports from your Square dashboard. These reports break down taxable and non-taxable sales by location and time period.

What if I add a new sales channel or location?

You must update your Square tax settings and register for permits in any new state or jurisdiction where you have nexus. Monitor your sales to ensure compliance as you expand.

How do I handle refunds and tax adjustments?

Refunds and adjustments must be reconciled manually in your accounting records. Automation tools like Webgility can sync these changes across platforms to keep your books accurate.