A few years ago, I left the sales tax outsourcing service provider that I spent 11 years with to embark on a new journey – one with my client, a Fortune 100 company where I would serve as an Indirect Tax Manager for Compliance within their Indirect Tax group. Few people have the opportunity to work on both the provider and client sides, and I was thrilled to make the transition.
After orientation, connectivity lunches and meeting the team; I was immersed into the group and quickly learned that my 11 years in sales tax outsourcing had taught me little about how a business determines nexus, creates taxability rules, manages the sales and use tax accounting process, handles audits, controls risk, and ensures that millions of tax liability dollars are remitted each month. While on the service provider side, my calendar revolved around the filing due dates with the 20th due date being the most stressful. Responding to customer inquiries and resolving notices was “filler” activity between filing due dates.
On the client side, I quickly learned how challenging it was to rely on my service provider to help manage my own workflow. For example, in order to respond to an audit inquiry, I had to speak with my service provider to better understand how a certain set of returns for a jurisdiction was prepared. The problem I encountered was that my question was during the first part of the month – prior to the 20th due date when the service provider was focused on returns. My common response on the service provider side was to push the client request out as far as possible in order to get the returns out the door. This seems like a natural way to do things while on the service provider side. However, on the client side, I quickly saw how frustrating this could become.
I’m back on the service provider side, and what I’ve learned over the years is that most service providers are focused on preparing sales tax returns. That’s their focus. Some service providers even describe their service as “Returns Outsourcing”. This type of service revolves almost entirely around getting data on returns and filing by the due date. The client is left to manage the rest of the sales tax process – nexus questions, taxability issues, registrations, audits, etc. I’ve now learned there are different options available. I’ve discovered the difference between “returns outsourcing” and providing a true outsourced sales tax function – or an outsourced sales tax department.
With an outsourced sales tax department, when the client has a question, the service provider answer is, “Sure. Let me help with that.” Not, “I can help you with that but your returns won’t get filed on time. Do you want me to stop the returns process to help with this? Or can you wait a couple of weeks?” As an outsourced sales tax department, the service provider truly becomes an extension of the client’s organization, a true partner.
If you’re struggling with a sales tax outsourcing relationship that is returns-focused, we’d love to discuss how an outsourced sales tax department might help. Additionally, here's a link to our quick guide on how to smoothly transition your service from one provider to another.
TaxConnex, LLC, America’s leading independent sales and use tax outsourcing and consulting firm, and Business Licenses, LLC invites sales tax and licensing professionals to a webinar - “Five Steps to Sales Tax Compliance."
Deciding how to become sales tax compliant can be very confusing - especially if you've not collected sales tax in the past. This webinar will outline five key steps to ensure you have minimized the sales tax risk in your business.
Specific topics and mini-case studies include the following:
- Determine your sales tax nexus footprint
- Understand the taxability of your products and services
- Quantify your potential prior period exposure
- Develop a remediation game plan
- Execute your strategy
Included in this webinar is a discussion of the Marketplace Fairness Act and fifteen minutes of questions at the end of the presentation.
“This webinar covers the big issues in sales tax. We cover nexus, taxability, exposure and remediation,” says Brian Greer, TaxConnex Partner and VP of Sales and Marketing. “Plus, we are addressing the Marketplace Fairness Act. So, this is a good webinar to learn and ask questions.”
The webinar will be Thursday, November 14, 2 PM Eastern, 11 AM Pacific. A registration link is here.
TaxConnex, ‘your outsourced sales tax department’, is America’s leading independent sales and use tax outsourcing and consulting firm. Using a team of experienced tax and accounting professionals, TaxConnex provides sales tax outsourcing, sales tax consulting and VoIP tax service to businesses of all sizes with a focus on technology companies, small and mid-sized businesses, and VoIP providers. TaxConnex provides a complete set of highly customer intimate services including end-to-end compliance, data analysis, remittance, reporting, notice resolution, question handling, proactive suggestions, straightforward advice, and audit support.
Sales tax compliance is riddled with risk for the tax payer. A lot of the risk is external to your business. There are thousands of taxing jurisdictions – each seemingly with unique sales tax rates and interpretation of what’s taxable and not taxable. A solid compliance process helps minimize this external risk. However, what happens when the risk originates internally in the form of turnover or some other internal disruption?
The best way to manage risk associated with potential disruptions within your sales tax department is to maintain thorough documentation of your department’s compliance processes. Process documentation helps to reduce confusion related to process responsibility among staff members, can serve as training material for new staff, and can help non-department members understand department responsibilities.
The following areas at a minimum should be included in your documentation:
- Data Management: Include a list of source reports for monthly sales & use taxes, what systems the reports are generated from, who is responsible for generating the reports, where the reports are stored, and when they are available each month. Also include a description of what information from each report is used and how.
- Tax Calendar: Maintain a listing of all tax returns that are filed for each company, who is responsible for filing the returns, account IDs, filing frequencies, due dates, login credentials, payment methods, and reporting methods.
- Return Specific Instructions: Document all return specific requirements such as manual adjustments, prepayment calculation methods, and credit reporting.
- Document management: List all documentation and backup workpapers that are stored for each return and where they are located.
- Reconciliation Procedures: List all G/L accounts that are impacted by the compliance process and the specific reconciliation procedures for each account
This level of documentation will be managed by your sales tax outsourcing partner if you choose to outsource your sales tax compliance process.
However, if you choose to manage sales tax compliance internally, by keeping thorough documentation of your processes the benefits will reveal themselves in terms of time savings, accuracy, and ease of transitions, when or if you experience some type of internal disruption.
In recent weeks I’ve talked with at least three companies who sell to end-user/consumers who have told me that they don’t have any sales and use tax risk because they pay sales tax to their vendors – while they failed to charge sales tax to their customers. They are comforted by the fact that “the state got their tax revenue and therefore shouldn’t come knocking for more”. When I tell them that they still have a sales or use tax liability, they are surprised. When I tell them they may not get ANY credit for the tax they paid to their vendors, they get irate – “What do you mean I still owe the tax – that’s double taxation!”
Sales tax is imposed on the sale at retail of tangible personal property. Therefore, sales tax generally doesn’t apply to wholesale transactions – as long as the appropriate exemption/resale documentation is executed. When a reseller fails to provide the appropriate exemption documents to its vendor, the vendor is required to charge sales tax to the reseller. Subsequently, when that reseller sells to the end-user/consumer, there is a sales tax due on that retail sales price.
Under audit by the state, the fact that sales tax was paid to the vendor by the reseller is irrelevant and cannot be used to offset the tax due on the retail sale to the end-user/consumer. When the reseller isn’t registered for sales and use tax purposes, the statute of limitations doesn’t apply. As a result the state can assess the reseller on sales made for the last 10 years or more.
To recover any sales tax paid in error to the vendor, in most states the reseller is required to request directly from the vendor a refund of the sales tax paid. The statute of limitations applies to the sales tax paid by the reseller to the vendor. So in a state with a 3 year statute of limitations, the reseller has no recourse for recovering any tax paid to the vendor beyond the last 3 years. If the audit goes back 10 years that could mean they will forego 7 years of sales taxes paid in error to the vendor. Even within the statute of limitations, the reseller may be able to recover the tax paid in error to its vendor, but the assessment will be based on the gross sales price which includes markup – so there isn’t a complete offset to the audit assessment.
Since the sales tax rates are on average in excess of 9%, a company with net profits of 20% could lose half of their prior year profits as a result of a sales tax audit. In addition, the state is going to apply penalties and interest. With penalties and interest, you can experience a net negative impact of 10% to 15% of your gross profit, even after you recover taxes paid to the vendor.
Companies are best advised to truly understand their sales tax nexus
footprint and where they are required to collect and remit the sales tax. Sales tax is meant to be a burden on the buyer and not the seller. The seller is simply the convenient collection agent for the state. The lesson here is to invest in the compliance processes to ensure sales tax is truly a pass-through for your business and has minimal impact on your bottom line.
I was recently meeting with clients and prospective clients about sales tax compliance outsourcing and had an epiphany. Basically, I realized that there are two types of sales tax compliance services. One is described as a fully automated service and one is described as a service that uses automation as a tool. Companies looking to purchase a sales tax outsourcing service must understand the very subtle distinction between these two types of providers in order to make a decision about the type of service that bests fits their needs and expectations.
After 20 years in the sales tax compliance business, with more than a few mistakes along the way, I know that automation works predictably only when the data inputs are consistent going into the system. We all know that as a general rule, sales tax data inputs are completely opposite of consistent. Specifically, the various tax calculation systems, and the implementation of those systems, vary greatly from taxpayer to taxpayer. As a result, it is challenging to get one consistent automated input from the disparate data outputs from these systems.
If you’re a sales tax outsourcing service provider that believes in a fully automated solution, the data inconsistencies coming out of the various tax calculation systems is further complicated by the challenges of maintaining rates, rules and forms subject to frequent changes in the return preparation software. The energy and resources that are required to develop and maintain a comprehensive “one size fits all” sales tax compliance system define the business model. The company’s culture, IT resources, and metrics are all focused on a fully automated sales tax compliance service bureau. Having lived in the business model of an automated service solution, I know first-hand that despite great expectations otherwise, basic customer service takes a back seat to the goal of automation.
In our rapidly changing world of technological advances, I see old-fashioned customer service being replaced by IVR, automated processes and electronic communication. In other words, it seems impossible to talk to a live person anymore. The fully automated sales tax solutions follow this trend as well. More specifically, the automated service solutions create so many specialty layers in the process, it is difficult to get a single point of contact that is knowledgeable about your business and your data and is empowered to make decisions and get things done. As a result, the automated service providers are slow to respond to questions and generally respond electronically to avoid hearing the frustration in the customer’s voice. The automated solution is not conducive to customer-intimacy.
The primary benefit of an automated solution is price. The providers of automated solutions try to substitute technology for an experienced person, charge less for their service, leverage the technology investment and more rapidly scale their business. This is a good business model and a reasonable “service” for some companies. Specifically, I think the automated service solution works best for companies with sufficient internal sales tax functions to manage the outsource provider and carefully review their output.
In contrast to the automated service solution, a service provider that uses automation as a tool generally must have an experienced sales tax and accounting professional to manage disparate data inputs and the automated tools. The accounting professional must have a breadth and depth of knowledge and experience to understand and navigate the intricacies of the customer’s data and the tools necessary to manage the data and prepare the tax returns. To complement the service professional, the provider must have strong processes and technology to manage the predictable pieces of the sales tax management and compliance, such as filing and remittance (or treasury). The downside to a service provider solution is the risk associated with losing the primary point of contact that learns and maintains legacy knowledge of the company. However, this risk exists with any competent professional or vendor with a specialty skill.
The bottom-line is that sales tax compliance requires a combination of automation and competent human resources. When you select the outsource vendor, make sure you get the degree of both that meets your needs and expectations.
If passed, the Marketplace Fairness Act (MFA) aims to subject remote sellers to the sales tax collection obligations of a traditional, in-state seller. More specifically, a business currently must have sales tax nexus in a state before that state can subject that business to its sales tax rules. MFA will do away with this and force the out of state seller to collect and remit the applicable sales tax. As I’ve described in previous posts, MFA has far broader tentacles than just ecommerce businesses. MFA has the potential to impact every business. Let’s take a look at manufacturers that are involved in drop shipments. Here’s a typical situation:
- A buyer in State A calls a seller in State B and places an order for a widget.
- The seller in State B places an order with a manufacturer in State C.
- The manufacturer in State C ships the widget to the buyer in State A and sends an invoice to the seller in State B.
- Neither the seller nor the manufacturer have sales tax nexus in State A where the buyer is located.
In this example, no sales tax is due because neither the seller nor the manufacturer have sales tax nexus in State A. However, the buyer should accrue use tax based on State A’s rate.
Let’s look at this same example if MFA becomes law. Same basic set of facts are present as above, however, the manufacturer in State C that ships the widget to the buyer in State A now must assess sales tax because they are considered a remote seller in State A. Likewise the seller in State B must charge sales tax to the buyer in State A. The seller also must present a resale exemption certificate to the manufacturer in order to exempt the transaction between the seller and the manufacturer. This will create substantial additional effort for the manufacturer to maintain these exemption certificates and for the seller to issue these exemption certificates.
Proponents of MFA point to “free” software that will automate the collection and remittance of tax. I don’t think the free software will work for the manufacturer above who now must collect and maintain exemption certificates where they didn’t need to before. What do you think would happen if state A audits the manufacturer and the manufacturer doesn’t have the exemption certificates? They should expect an assessment whereas before, when they had no sales tax nexus, this would not be a risk for them. I think things could get very messy for a manufacturer involved in drop shipments to multiple states in MFA becomes law.
At TaxConnex, we've been following the saga of Amazon and Georgia sales tax collection with special interest. We expected some "quid pro quo" where Amazon would agree to begin collection in exchange for an incentive of some sort. But, that doesn't seem to be the case. Certainly there's an interesting story that's not being reported.
Following is the story that IS being reported from The Atlanta Journal-Constitution.
I hear stories on a daily basis about how a company has been let down by their sales tax outsourcing vendor. Some of the scenarios are quite surprising.
- I hear about outsourcing relationships where payments are managed by one company and the returns managed by another company. It seems odd that two separate contracts and two different vendors are necessary. Who do you call with an issue? Who is really managing the compliance process? Seems like ownership of the process shifts back to the company that is outsourcing the process.
- I hear about vendors that require every return to be approved before the vendor will file the return. Sounds good on the surface, but when you have one business day to review and approve a hundred or more returns, can you really effectively review that many returns? Shouldn’t you have faith that your outsourcing vendor is preparing the returns correctly? If you don’t trust your vendor then you shouldn’t be outsourced at all. Seems like a way to shift the penalty risk back to the company that is outsourcing the process.
- I talked with someone recently who had worked with another sales tax outsourcing vendor for close to two years and could not identify their primary point of contact. This vendor’s process for issues resolution was for the client to enter a trouble ticket and then the “customer support” team would communicate via email to attempt to resolve the issue. The client had nobody they could call when or if there was an issue. Sounds like a technology company that is applying a help desk support process that is common in the software industry to a high touch service like sales tax outsourcing. Is that the type of service you really want?
I believe people have grown accustom to receiving this poor level of service and it just becomes part of their reality. They jump from outsourcer to outsourcer hoping to find better service and it’s all the same. An impersonal factory, that attempts to automate the process, and remove people from the equation.
There are options…much better options. If you’re looking for a better alternative, then perhaps we should talk. Learn more about the TaxConnex Difference.
Earlier this month, TaxConnex completed and made available to our clients the results of our SSAE 16 (SOC 1) and SOC 2 Type 2 reports. We’re proud to announce that our independent auditors noted no exceptions during their testing.
TaxConnex initiated the audit process because we want our clients to know that TaxConnex has a process they can trust. Now, it’s not just something we say, but it’s something that has been validated by an independent third party.
The successful completion of these audits marks an important milestone in our business as companies continue to trust their tax compliance reporting and payment remittances to TaxConnex. Having the tax compliance reporting and payment remittance housed under one roof has proven to be an important decision criterion for companies. Many other firms that provide a similar service rely on a third party payment processor which introduces two separate businesses into a process that is best centralized with one provider.
The audits reviewed numerous aspects of our business including establishing and testing the initial set-up of new clients, the controls designed to ensure accurate and timely return preparation and filing, data security and integrity, and most importantly the management and payment of tax remittances on behalf of our clients.
We believe the successful completion of the audits will continue to be important as our clients look for assurances that we are optimally managing their tax compliance process. In addition, the reports are almost mandatory to serve any publicly traded company. We’ll continue to invest in annual audits and reports and expect similar unqualified opinions from our independent auditors
If you are a TaxConnex client and wish to review the audit results, feel free to contact me or your Practitioner.
TaxConnex’s most recent webinar, “Telecom Tax: Simplifying the Tax and Regulatory Obligations of Your Communications Service”
is now available on demand.
Presented with our partners from The COMMLaw Group and SureTax, this webinar focuses on the complexities of tax and regulatory compliance specific to telecommunications services and the solutions that simplify the process.
Topics that are addressed include:
- Myths and misperceptions of delivering communications services over the Internet
- Difference between taxes and regulatory fees
- How the changing concept of nexus affects the taxation and regulatory classification of telecommunications service
- Options for streamlining the calculation and reporting of various taxes and regulatory fees
- How to return form non-compliance to compliance
Receive great information at a fast pace during this webinar, originally presented on TMCnet.
If you are involved with communications tax/telecom tax/VoIP Tax, you’ll want to see this webinar. Click here, Telecom Tax Webinar.