Nexus is a frequent topic of conversation with my clients – especially those that are considered small or mid-market businesses. There’s a perception that sales tax nexus equals income tax nexus. This is often promulgated by CPA firms that apply income tax nexus principles to sales tax nexus. This can be troublesome in certain situations. Take this example, a sales rep travels into North Dakota three days per-year to meet with clients and new prospects. Additionally, there’s a one-day trade show where this business displays their products. Orders are never accepted in the state. In this situation, the “frequent” visitation would likely meet the sales tax nexus threshold but the fact that orders are not accepted in the state would lead me to conclude that income tax nexus does not exist. So let’s follow this through. This business’s CPA firm rightfully determines that income tax nexus does not exist. However, the same assumptions used to confirm income tax nexus, when carried through to sales tax yields an incorrect result. Now, North Dakota sends a nexus questionnaire to the business and thinking they have nothing to worry about, the business fills out the questionnaire accurately. Much to their surprise, this business receives a notification that they need to register for sales tax purposes and North Dakota is scheduling an audit to review their prior activity and assess tax, penalties, and interest. Now the business is in hot water!
What’s the lesson learned? The determination that income tax nexus exists will almost always mean that sales tax nexus exists too. (If you have an example to the contrary, I’d be interested in your opinion.) However, sales tax nexus can most certainly exist without income tax nexus.
Recently, I’ve had several discussions with companies about a sales tax audit assessment they’ve received. They come to me in an attempt to negotiate a settlement with the state. The problem is that they were clearly at fault and are now struggling with the reality of paying the back taxes, penalties, and interest. There’s typically not much I can do in this situation unless they are willing to pursue an offer in compromise which requires the tax payer to share their financial details with the state…essentially proving that the full payment of the assessment will put them out of business. The angle is that the state is better off accepting some percentage of payment on the initial assessment while keeping the company in business long-term…ideally yielding a bigger financial gain long-term.
I always wish they would have reached out prior to the sales tax audit and been proactive in addressing their sales tax issues. There are many more options available to a taxpayer when you’re ahead of the curve. How do you make sure sales tax receives the attention it should in your business?
This is certainly the season for tax talk. Everytime I mention I'm in the sales tax business, I hear "Ohhhhh, you must really be busy right now!" I go to great lengths to explain that sales tax is a year round compliance issue and generally get left with a blank stare that tells me they don't have the foggiest idea of what sales tax compliance entails. The scary part is that some of these folks actually have businesses that collect and remit sales tax. Suffice it to say, sales tax just seems a bit more mysterious than other taxes...and a bit uglier.
This reputation of sales tax disturbs me, as you might expect. It is a tax, albeit a pass-through exercise. But most CPAs look down their nose at the compliance activity as if it's just not as important as getting your income tax returns bundled up and out the door. I'll admit, it is different than income tax, but do it wrong for long enough, and the consequences are just as severe as turning in an inaccurate Federal return. The difference is, you could have dozens of States looking to throw shackles on you.
It's important for a multi-state business to have their sales and use tax returns in order. Granted, few CPAs study "The Art of Sales and Use Tax Compliance" in their Masters of Tax curriculum, but they clearly could have benefited from it. At least they wouldn't dismiss the activity and would do more to embrace it and prepare their clients for it.
I talked with a client last week who is about to be audited. His CPA suddenly got nervous about the upcoming audit, and began to point fingers at the client because they had not self-assessed tax on a large volume of purchases. The client contends that the CPA is doing the books, and should have at least asked the question. I couldn't agree more, but it won't really matter to the auditor since they just found a nice stream to pan gold in.
My advice...don't ignore sales tax responsibilities. If you don't get strong advice from the CPA who files your income tax returns, don't fall asleep at the wheel. Call a sales tax expert and get a minute or two of informed opinion. Sales tax doesn't have to be the ugly duckling of tax, and it shouldn't be misunderstood for so long that it gets you into trouble.
Oh, by the way, sales tax doesn't have a busy season - unless the auditors all find you in April.
We live in such a challenging environment these days, and none are more challenged than a CPA during income tax season. I often speak to CPAs about how they deal with the grind, and every so often one of them says "I've had it!" Usually it's not an isolated, emotional comment (though I have heard some of those) but generally it's a work and personal life collision. After all, every CPA has a home life away from the countless tax forms and spread sheets. This just isn't the time of year to spend much time thinking about it.
There are so many tax businesses that could benefit from the experience of CPAs who decided that home needed to come first. Think of the number of stay-at-home Moms who have been professionally trained, have maintained their CPA or accounting skills, but just can't balance the schedule of a full-time tax job and gracefully managing a family. That, my friends, is a labor pool that can work magic for you...and for them!
TaxConnex has a talented team of CPAs and accounting professionals that have moved to a work from home status. Everyone wins - the family has them first and foremost, TaxConnex has the benefit of a marvelously talented accountant, the client gets access to a skilled tax resource, and the professional earns a nice stay-at-home income...and now has several conversations a day with an audience that has outgrown Barney.
Well trained accountants are a gem in the sales tax world. They can perform sales tax compliance as a regular responsibility, give ad hoc consulting advice as needed, perform nexus studies, address taxability issues, and manage audits. And all of it can be done from home with little distraction to the family.
I'm bought in. The work-from-home professionals that we've aligned with are world class. They know accounting, have a flair for tax, serve clients flawlessly, and make us a better tax and accounting firm. If you're a small or mid-sized business who needs help with sales tax, you should hire a firm that leverages resources like this. And if you're a CPA or accounting professional looking for a gig that keeps you close to the nest, you should call me. We've got a great client waiting for you!
There are a lot of sales and use tax firms that pitch their process of performing some type of reverse sales tax audit, or overpayment review, where the client has limited to no risk with the potential for a big payday. These firms will generally do their work on a contingency basis and thus no risk (or no out of pocket fees) to the client. However, not so fast.
How eager do you think most taxing jurisdictions are to turn over a refund? Not very nowadays. What I’ve seen in many situations when a company applies for a sales tax refund is an automatic audit. This is not necessarily a bad thing if the company has all their ducks in a row and any potential assessment has been factored in to the overall refund opportunity. The last thing a company wants is a scenario where they believe they are going to get a refund and then under audit determine there is unremitted tax elsewhere and they end up owing money in the long-run.
Each individual client situation will be unique so you can never take a one size fits all approach to something like this. But what I’ve seen work very well is to perform the reverse audit or overpayment review as part of an existing audit. The auditor is not always looking for situations where you’ve paid too much tax so they may “miss” something like this during their audit. However, a good sales tax professional will look for overpayment situations as a means to offset any potential audit assessment. In this vane, I’ve seen numerous situations where an audit with a healthy assessment resulted in a net refund or a net reduction of the assessment. And when you are able to reduce the audit assessment through this means, you’re also able to reduce the penalty and interest portion of the assessment.
If you are looking for help managing a sales tax audit, you may be interested in our white paper with the Top 10 Tips for Managing Sales Tax Audits. Or simply call us to talk through your unique situation.
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When looking at sales tax outsourcing solutions, you will want to consider the impact of the outsourced solution on your audit management process. If you’re a small or midmarket business, the level of audit support you require will look very different from that of a larger business.
For the small and midmarket business, you may need someone to manage the entire audit process for you. While the larger business will be focused on how to easily tie out their data to the returns. Let’s look at each of these situations more closely.
The small or midmarket business generally does not have the internal sales tax expertise required to manage a sales tax audit. They rely on their outsourced provider to help them in this area. They find themselves in hot water when they sign up with an outsourced provider that is focused on the large business market. This type of provider often sees sales tax compliance as a “factory-driven” process where their main point of contact is generally a clerical individual with minimal tax expertise or business acumen. This person is not capable of managing an audit for the small or midmarket business. Sure, they may have a separate consulting division that can help you but now you’re talking about extra fees that you may not have anticipated.
In the case of the larger business that has the internal tax staff to manage the audit themselves, their primary focus from an audit perspective is how to tie out the data sent to the outsourcer to the returns prepared. I’ve seen various outsourced providers that manipulate the client’s data, allocate it based on complicated and sometimes arbitrary rules that eventually make it difficult to follow the data through the process to the return. When the customer then asks for an explanation of what happened inside the black box, they are often not satisfied with the response. The end result is a complicated and difficult to describe audit trail.
The lesson? When looking at sales tax outsourcing options, understand what level of audit support you need and what level of audit support your outsourcer is designed to provide.
So many small/mid-sized businesses are strapped for cash in today's frustrated economy. This makes the notion of meeting all your obligations, while remaining fully tax compliant, all that much more challenging. Lest we forget, the businesses we all know as "taxing authorities" are wrestling with the same challenges. Revenue is tighter and expenses are giving them little breathing room. Unfortunately, smaller businesses end up in their cross hairs much more frequently in times like these.
So what's a company to do? The cost of having complete sales and use tax compliance can sometimes push a company into the precipice. It seems overwhelming...illogical...even unfair at times. This problem of sales tax compliance needs to be approached like any other financial dilemma or hardship - do the very best you can and let strong business ethics be your guiding light.
I don't know about you, but when I feel financial strain, I always look to remove whatever small piece of it I can...immediately. If it's a small obligation that I can just get into "the rear view mirror," I'll get that taken care of first. It always makes the next biggest issue that much easier in the short term. So why not tackle mounting sales tax compliance issues in the same manner? Here's where this logic leads you:
- Pick an issue/payment that you know you can handle, right now, and take care of right now;
- Once that issue is out of the way, apply those freed up funds or resources to solving the next issue that you can most quickly solve...and start making progress on that one, soon;
- Once you've overcome these smaller obstacles, the larger ones seem much less intimidating. Over time, you have incremental resources to apply to those and get them scheduled to be "off your chest."
- The most diffcult issues might require deeper spade work - Voluntary Disclosure, Nexus research, Sales Tax Amnesty Pursuit - but you can get inexpensive sales tax consulting help for that.
Look, each of us wants to be compliant and up to date with all that we owe any jurisdiction. It may take some uncomfortable effort to keep up with it, but that's much better than the scrutiny, audit defense, or penalties and interest which accompany a deep dive into our compliance efforts. The only thing that makes this deep dive more tolerable is knowing that some of the compliance issues are off the table because of your diligent efforts to be up-to-date.
Finally, just like you, an auditor is much more tolerant of a company that is trying. Doing nothing to handle historic compliance issues is a bad statement. Doing something, whatever you can, is a great character statement for your business. And if "doing something" even seems too hard, consider the alternatives. Those won't be up to you, eventually.
Recently, the Missouri Administrative Hearing Commission dismissed the appeal of a taxpayer's claim for refund of sales and use tax because it was not timely filed. The appeal, which was mailed within the 60-day period to appeal, named the Commission as the addressee stating the Commission's address. However, the envelope in which it was sent was addressed to the Department of Revenue and wasn’t delivered to the Commission until July 28, 2010, 61 days after the taxpayer received the decision denying its original claim. In other words, one day late.
The taxpayer did not transmit its complaint by certified mail to the Commission; it transmitted the complaint by certified mail to the Director. The Commission is a neutral, independent agency that is separate from the Department of Revenue. Because the complaint was not transmitted by certified mail to the Commission, it was not filed until the Commission received it on July 28, 2010, and therefore, was not timely. (Associated Fire Protection v. Director of Revenue, Administrative Hearing Commission, Dkt. No. 10-1449 RS, 09/02/2010 .)
While I normally support the judgment of the jurisdictions in matters of “form over substance”, in this case I believe the Commission should/could have used discretion in affording the taxpayer the right to appeal. It is important to acknowledge that form over substance normally favors the taxpayer as much as it does the state. However, jurisdictions will hold taxpayers accountable when they don’t employ reasonable and prudent inquiry when accepting a certificate of resale. It seems to me that under the circumstances outlined in the above matter, the jurisdiction should have been reasonable and employed some common sense in its determination – and concluded that the taxpayer met the requirements of the appeals process.
Chalk it up to another example of reduced leniency as a result of enhanced sales tax collection efforts.
Please join us for our free September webinar, entitled "Audit Management - Before, During, and After" from 3:00 PM - 4:00 PM EST on Thursday, September 30th.
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Overview
Managing a sales tax audit starts before you get the written notification of a pending audit and continues through its conclusion. There are proactive steps you can take to ensure you are prepared for the eventual sales tax audit. Additionally, there are strategies to use during the audit and at its conclusion to minimize your risk both short-term and long-term.
In this free webinar, TaxConnex Partner and industry expert Jeff Meigs will explain:
- What steps you can take prior to an audit notification to ensure you minimize your risk;
- How to manage the audit and the auditor once the audit begins;
- What to do about known risks/exposure under audit; and
- Options in responding to the final assessment.
There will be time reserved for questions and discussion during the presentation and in our Q&A session following, so please get your questions aired…and answered!
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