End-to-End Compliance

Your business’ sales tax obligation starts with nexus. Tracking your nexus footprint is an important piece and is one that needs to be done on a somewhat regular basis. Nexus is defined as a connection with a state or taxing jurisdiction. This connection is defined by either a physical or economic presence.  

Since the 2018 Wayfair decision, every state with a statewide sales tax has enacted economic nexus thresholds. In addition, some local jurisdictions have as well, including in Alaska, a state that is typically considered a state without sales tax. The economic presence test varies from state to state with different thresholds and measures, including gross sales, taxable sales, and retail sales.

View our economic nexus map for a more in-depth overview of economic nexus requirements.

Physical presence standards did not go away after Wayfair. These standards that have been in place for decades still exist. When considering a physical presence, states tend to use vague terminology including a “substantial” physical presence. But what exactly does this mean? The taxpayer is left to interpret whether their activities rise to the level of a substantial physical presence or not. A physical office in a state can be viewed as substantial physical presence but many people overlook other activities that can create a physical presence. Learn more about can create a physical presence here. 

Once you’ve established your nexus footprint and mapped out where you have established nexus, you must determine if your products/services are taxable in those states.  You don’t yet have a sales tax obligation until you have completed the next step.  

Taxability refers to whether sales tax applies to your sales or not. Generally speaking, tangible personal property is taxable and services are exempt – unless otherwise stated.  The “unless otherwise stated” is a critical disclaimer.  For example, certain products used in the medical field can be viewed as tangible personal property but are not taxable due to the type of product – there are many exemptions associated with the medical profession. Likewise, telecommunications “service” is one of the most heavily taxed services in a lot of states.  Taxability can be confusing with software as well - is Software-as-a-Service taxable?  It sounds like a “service” but by early 2019 more than a third of states were taxing SaaS delivered software (some have since stopped).

Similar to nexus, laws are different across states for taxability. 

Check out TaxConnex’s SaaS taxability map to see how some states classify taxability of SaaS products. 

Once you understand where you have sales tax nexus and the taxability of your products and services, then you need to determine how much tax you should have collected historically. The purpose here is to determine how much sales tax exposure you have before you register and start complying prospectively in a state.

Initially, an estimate of the amount of exposure is sufficient to provide a direction for becoming compliant. If there is previous non-compliance a further analysis should be started.  Turning to an expert to evaluate your previous non-compliance can help ensure you right any issues from the past.  If your exposure of non-compliance is extensive, a voluntary disclosure agreement (VDA) may be a good move forward.  

There are two pieces of information required to calculate the applicable sales tax – (1) tax rates; and (2) taxability rules.  If your business operates in three or fewer states where sales tax is determined at the state level, then you likely can manage the associated rates and rules. As a general rule, if you find yourself investing more than two hours a month in sales tax management, automating your sales tax solution is likely a more cost-effective approach.

If sales tax calculation software is needed, there are different companies you may consider based on your needs.  Today, most sales tax calculation software is delivered in the cloud via a Software-as-a-Service model.  These tools automate the sales tax calculation process by integrating with the invoicing or ERP system through a pre-built integration or via an API (Application Programming Interface).  When it comes time to create a customer quote or invoice, the ERP system will pass certain data elements (customer location, product, sales amount, etc.) to the sales tax calculation system which will then calculate the sales tax and pass it back to the ERP system the applicable sales tax.

With the right tax engine technology, you can fully automate this step of the process. Look for a solution that provides a modern architecture, robust rules engine, and transparency for reporting.

No matter how many times you may hear differently from automated solutions, there is a human aspect even to their technology and support that if missed can cause some big missteps when it comes to maintaining your compliance.  

Now that you understand where you have a sales tax obligation, understand the taxability of your product/service, have determined your sales tax exposure and how to manage adding the correct tax rates to your invoices, it’s time to register and start collecting and remitting.

Sales tax registrations are completed at the Department of Revenue within each state.  As part of the registration, you are provided a sales tax id number and are granted the authority to collect and remit sales tax in that particular state.  Similar to nexus and taxability, each state has its own set of rules for which companies must file based on certain filing frequencies and methodologies. 

Sales tax registrations can be challenging if you ‘ve not completed them before and especially if you are filling out quite a few. Be sure you are registering for the correct tax type.  All sales tax registrations will have a question as to when you started conducting business in their state. If you register with a start of April 15th, then a jurisdiction will likely require an April return if they have given you a monthly filing frequency. If you have registered with a particular start date, but there was a change of plans and you did not start collecting until a later time, it is important to file a zero due return or else you could be subject to a late filing penalty. 

Once registered it is time to create a process to manage your own-going filings. This process should consider the following 4 things.

1. Tax Data Reports: In a perfect world, all of your sales tax calculations will be managed in one system, and you will be able to produce a single report each month that provides details with all of your sales and use tax liabilities. However, the reality is that businesses grow, they acquire other businesses, they change accounting systems, they launch new e-commerce platforms - all resulting in different sales tax processes. Be sure you have a process to gather the applicable data each month and reconcile this data to your general ledger before you start the filing process.
   
   
2. Tax Calendar Management: It’s critical to maintain an accurate tax calendar that reflects where your business is registered for sales tax purposes, the filing frequency of each return, the e-file login credentials, and other state-specific information. This tax calendar is not a static item, it will need to be maintained and updated over time as your filing frequencies may change or you may register in additional state or local jurisdictions. These frequencies could be monthly, quarterly, or annual – although some states have semi-annual, bi-annual, and other filing frequencies. 
   
   
3. Online vs. Paper Returns: You should have a process to prepare and file both online returns and paper returns. Most every state will be an online filing with an electronic payment.  Local jurisdictions often require paper returns with a check.
   
   
4. Notice Management: Jurisdictions enjoy sending you mail. Or often these days an email or worse, a note within the state site, something someone needs to be monitoring. Some of this mail may be informational but still critical.  For example, you may receive a notice of a change in filing frequency from quarterly to monthly. Or it could be a penalty for a missed or late payment.
   
   These deficiency notices generally have very tight time frames by which you must respond so it is an important piece of the process to ensure someone is monitoring for notices.  
   
   
5. Controls: If you are a public company or have various financial covenants, you will have to thoroughly document your process including the various controls in place that ensure the process is executed effectively each month.  These controls will also have to be reviewed periodically and tested to ensure proper operation.

When looking at a complex sales tax situation and all the steps needed to maintain compliance it is hard to decide how to manage it all.

For many businesses there are three options, only two of which we’d recommend for complex sales tax situations.  Manage sales tax with an in-house team, outsource to qualified experts or roll the dice and remain non-compliant.  If you have a large sales and use tax obligation with a complicated solution, we do not recommend rolling the dice, as the penalty and interest can ruin a business if audited, and often one bad audit can turn into multiple.

In the current job market and economy combined with the continual evolution of sales and use tax laws, we’d advise finding an expert to outsource your obligations to.

With TaxConnex and CereTax’s combined solution we give you a full end-to-end compliance solution. All 6 steps covered for you, all with the expertise and hands-on support to fully take it off your plate.  Get in touch to learn more about how we can help you cut through the complexities of managing your sales and use tax obligations and take compliance off your plate.

CereTax is a next-generation sales tax automation solution that leverages the latest cloud technological advancements to revolutionize how a sales tax calculation platform operates. Built by tax experts who understand your sales tax needs, CereTax utilizes a modern architecture, robust rules engine, and built-in transparency. CereTax is the sales tax automation solution you can trust. Learn more at www.ceretax.com.