Small and medium sized businesses are forced to be thoughtful and frugal about staffing as they work to make a buck in this economy. So...not many of them are clamoring to staff a sales and use tax group to ensure they pay everything they possibly could to a State or Local Jurisdiction. Instead, they do what they can do, with whomever is available, to make decisions about sales tax collections and then get the monthly returns out the door. What goes unattended are things like understanding their nexus, determining the true taxability of products/services, automating their processes, managing exemption certificates, taking advantage of amnesty/Voluntary Disclosures (if needed), and gracefully navigating audits. The question is, if these things are tablestakes in managing sales tax, why aren't companies motivated to invest in them? The answer is simple - it's because of who's minding the sales tax shop.
You see, a small business that is growing finds out what their sales tax obligations are - they don't generally plan for them. The burden of handling the responsibilities they just found out then shifts to someone who wasn't hired for that unplanned responsibility. As the burden and responsibility grows, that person who inherited sales tax does what they have to do and what they know how to do - get the returns they've always filed out the door. So the person minding the shop is someone who knows very little about the discipline of sales tax. It's kind of like having a mail clerk eventually ending up with the responsibility for responding to investor questions. It all started with the mail, and he's good at opening it...right?
What invariably ends up happening at a growing small business is that sales tax gets slightly out of kilter. An assessment rocks your world, an auditor wears you out, notices get your goat, or an oversight results in some financial (over even criminal) liability. It's the common cycle, because your accounting clerk doesn't know how to side step sales tax landmines any better than the mail clerk knows how to keep investors happy.
The real issue is that most growing businesses don't even have an understanding of what kind of liability or trouble they are creating by ignoring sales tax. It's a silent killer, and it shows up infrequently enough that you feel safe...until it does show up. The other impediment is that even a wildly successful small business can't afford to hire someone with sales tax "insider knowledge". There's just not enough for them to do to justify their salary. You feel confident in letting the mail clerk mind the shop. Until the auditor shows up. Or the assessment rolls in. Or the shop gets closed.
So think about these as alternatives. Buy just enough time every month from a sales tax professional to keep you compliant and in the know. If he's worth his salt, he's quick, knows where the landmines are, and can save you more than he costs. Or hire a sales tax person who can also be taught to handle other tasks competently. Think of it this way - it's like having an Investor Relations manager who really likes to open and distribute mail, in contrast with a mail clerk who is good at sorting mail, but dreads communicating with investors.
You'll get a much better outcome if you're intentional about getting the sales tax help you need! One call to an expert like TaxConnex could get the right person minding the shop.
Transaction taxes impact everyone, but clearly some more than others. A number of businesses have transactions that are almost exclusively subject to sales tax, while others deal primarily with clients who are sales for resale. A number of businesses have a customer list of government entities, non-profits, and exempt entities, yet the business next door is selling a communications service which is heavily taxed by virtually every local jurisdiction. But, every one of these businesses has the responsibility to collect and remit sales tax, use tax, communications tax, B&O tax...or to collect the proper documentation to demonstrate that collection and remittance is not necessary. Nobody, at all, anywhere, anytime, is exempt from some collection or documentation process.
So why do so many businesses consider the transaction tax process optional, at least until they're taking on water? I think it's one of two classic reasons:
- They're drowning in daily activity to keep their business running smoothly and profitably, and view one more administrative burden as the proverbial 3rd count; -OR-
- They suffer from a lack of education on what they need to do and what the consequences of failing to do that will be.
Either way, they need help; and to not ask for it is to simply acknowledge that you are willing to drown later. My experience with sales tax problems is that the longer they are ignored, the more burdensome and overwhelming they become. An initial collection problem becomes a collection, payment, penalty, and interest problem later. What's interesting is that many of these business owners and CFOs are such progressive leaders, coaching their business through very troubled waters with issues of sales, accounting, technology, competitive strategy, and tricky staffing. But not sales tax.
How's this for an example...a $400M private business is knocking it out of the park with sales and distribution. They augment their growing technology business (which sells a device that is employed in others' final technology solution) with a service that is purchased directly by consumers through salespeople in various states and on the web. For their "wholesale" business, they have collected exemption certificates when it was convenient, but they aren't going to halt sales success in favor of administrative requirements. Their accounting team only files a minimal number of sales tax returns anyway, and nobody has questioned them about it...yet. But now they are selling to end-users, and they adopt the same philosophy - don't slow sales because there are adminstrative details to attend to. Makes sense, right?
Fast forward one year - now they're a booming $600M business, with an enviable retail revenue stream, which has not been collecting appropriate transaction taxes on their services, and has not been documenting their bread-and-butter exempt sales. An auditor uncovers their failure to pay sales tax during an audit of one of their customers, and sends a questionnaire, which the accounting clerk responds to without recognizing the significance. You see where this story is headed - next comes the audit, then the 7-figure assessment of tax on the incremental $200M in sales, and a cool $100k in penalties and interest on the whole deal. And if that's not enough, the auditor sniffed around the whole exemption certificate process, sampled, and staked a claim on half the revenue that was truly exempt, but not documented. Now there's a CFO and his CPA advisor going down for the third time.
While the story is a bit sensational, it happens every day. Take away a couple of the zeros on the sales volume, and it's probably some of you. At the time of your greatest business breakthrough, you've created your greatest business risk. With stinkin' sales tax...that goofy adminstrative task which slows things down. Where's the life ring now?
The moral of the story is, obviously, to know what kind of water you're jumping into and to be trained and ready for it. Sometimes you don't have the background and tools to understand what awaits you, so get help from a professional before it costs you a lot of thrashing about in the water. While it's rarely impossible to fix the sales, use, and transaction tax problems, it's definitely less damaging and much cheaper to fix them up front with proactive effort. In business, as with swimming, not knowing the dangers doesn't exempt you from the threat of drowning. It only means you better have somebody awfully good at throwing the life ring.