Half a dozen ways to mismanage sales tax

Sales tax compliance has many moving parts, not just in the filing but in everything that goes into making sure you stay on the legal side of the jurisdictions where you have sales tax nexus.

Just remember, a lot can go wrong along the way with many tax challenges and pitfalls to navigate.

1. Billing systems

You charge the customers sales tax for online purchases, they pay and you remit the money to the tax jurisdictions. Seems simple. Yet often we see differences between a client’s billing system and their tax reporting.

You could be billing taxes within your billing system and yet haven’t filed a single sales tax return and haven’t tracked the tax data to be aware of a future filing obligation. Tax types and nexus pose other wrinkles. In states like Kansas, for instance, you may have to file multiple, different types of returns, and your billing system may have nexus thresholds and tax rates entered that are different from what jurisdictions mandate.

Problems with your system can mean you can’t calculate sales tax or that you miss notices and don’t stay on top of requirements such as mandatory e-file, which actually creates a penalty for a paper filing. Your system also needs to correctly calculate and account for tax rates at a local level, which can be a complication especially in home rule states like Louisiana and Colorado.

2. Tax calendar

We encounter this problem often with clients: incorrect sales tax registrations that became outdated as years went by without verification and updating. This can mean you are truly disconnected from a tax jurisdiction – including from getting critical correspondence from them. You’ve also probably fallen out of step with ever-changing filing frequencies, which change often. This can get expensive for back taxes, penalties and interest if, say, if have your calendar set for an annual return and you miss monthly or quarterly filings.

The same applies to jurisdictions’ prepayment/deposit schedules. For instance, California and New Jersey have a quarterly return but a monthly sales tax remittance/prepayment requirement if you reach certain sales thresholds. Especially if you handle your compliance in house, you may have also paid local taxes to a state.

States frequently introduce new sales tax returns, such as Colorado and Minnesota for their new retail delivery fees. Commercial activity taxes in Ohio and Nevada are also often missed.

3. General ledger management

Your GL is a key reconciliation point to make sure you’re capturing all sales tax that you’re remitting and that you get the credits and adjustments you have coming, such as vendors’ discounts. Your GL is also the source for confirmation of such cleared transactions as ACH debits and checks. (Note that some tax jurisdictions block ACH debits.)

4. Returns

Both late filings and missed payments can ignite penalties, which are expensive. Some states, such as Florida and Texas, can give one due date for payment and another for the return, meaning you could find yourself with an unexpected penalty.

5. Insufficient resources

Sales tax compliance is not a value-added responsibility for you: It’s a tax-collection responsibility imposed on you. You might lack dedicated resources for the task or have a staffer doing the job with no oversight or review. (In the latter case, make sure that your person monitoring your sales tax compliance has someone checking their work – or you risk missing key notices or having recurring mistakes compounding.)

Sales tax rates change fast; it’s best to have someone in your company dedicated to keeping tabs on that. Tax rates are generally updated quarterly, so these differences might not be an issue with every monthly filing. But they can impact quarterly returns. Tax rates in your system should be updated at least quarterly.

If your web-portal administrator leaves your company, it can be difficult to log back into jurisdictions’ portals to keep up. Make sure logon credentials are documented to train someone else or that they’re maintained by more than one person on your team.

A word here about web-portal reviews: Once you’ve registered and filed, look at the messages and letters. There is a lot of junk – states over-communicate – but there are important notices and it’s an efficient way to find out if you have prepaying or filing frequency changes. On portals you’ll also find information on other taxes, such as Washington’s B+O tax.

6. Audits

Thankfully, you may never go through a sales tax audit. But have workpapers or data related to returns that you filed and have a process to capture these records.

Regarding reconciliation of data to your sales tax returns, auditors don’t generally look at returns, but you still should prepare your return as accurately as possible. Auditors will ask for data and any related invoices. Double-check the presentation of your invoices.

For more on what can go wrong with sales tax compliance, see our webinar “Sales Tax Filing – What Can Go Wrong?”

Let TaxConnex manage the burden of keeping up with all the tax challenges and changes that come with staying compliant. Contact us to learn what it means when sales tax compliance is all on us.