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.
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.
A great number of issues I help resolve are pretty easy to prevent. Mechanics will tell you that it's not so hard to avoid a car that won't run if you'll just check your engine once in a while. I think it's the same issue with sales tax - you just need to check your tax engine once in a while. Just like the mechanic who deals with an angry customer who's been stranded on the road...in the rain...on a cold day...with no jacket, a couple of my advisory conversations have gone the same way. Somehow, somebody, or something else caused their tax problem and they have to deal with the repair issues now. So the DOR and I get the brunt of their sore temperament about the situation.
Sometimes the rules, rates, changes, etc. aren't clear - I really do get that. What I don't get is how someone can sign a return when they are not certain about what it contains. I mean, eventually the sales tax data has to connect to the returns which has to reflect the statutes...right? That's what the auditor will tell you when he shows up. So why does someone submit a return where they haven't already connected the dots on data-to-return-to-statute? It's probably because they don't know how...just like I don't know how to get the gasoline to my fuel injector, which eventually results in power getting to my wheels.
Make sure you're filing something that makes sense and keeps you in full compliance. And if you don't know, ask someone who can advise you properly. It's a shame to have to ask someone after the auditor has already shellacked you, and nothing can really be done about it.