How to Establish a Sales Tax Compliance Process

You’ve established you have nexus in multiple states, and understand the taxability of your products and services, now what?

Putting the numbers on a return and sending to the various jurisdictions is often viewed as the easy part of sales tax compliance.  However, in addition to various state and local returns and the various level of detail required on each return, there are multiple other factors to consider when establishing a compliance process within your business.

Manage Tax Data Reports. In a perfect world, all sales tax calculations are managed in one system and a single report can be produced each month that provides details with all the 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.  Each of these different sources of sales tax information will need to be incorporated into the filing process and require the mapping of this disparate data to the individual return(s).

Maintain a Tax Calendar. It’s critical to maintain an accurate tax calendar that reflects where a 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 filing frequencies may change or a business may register in additional state or local jurisdictions.  Even if you outsource the return preparation and filing, depending on the vendor, it is often the responsibility of the business to keep this calendar updated.

Prepare for filing. A sales tax compliance process should include the ability to prepare and file both online returns and paper returns.  Most every state will require an online filing with an electronic payment.  Local jurisdictions often require paper returns with a check.  Some businesses will struggle with the internal deadlines to have checks or payments authorized in a timely fashion.  Unfortunately, the jurisdictions will not adjust their due dates based on internal limitations.

Handle Notices. Jurisdictions enjoy sending notices.  Jurisdictions will also post notices to a taxpayer’s e-file account.  Some of these notices may be informational but still critical.  For example, a jurisdiction may send a notice of a change in filing frequency from quarterly to monthly.  Missing this change and skipping two monthly returns will result in a penalty.  Additionally, jurisdictions may send a deficiency notice that requires an issue to be resolved.  These deficiency notices generally have very tight time frames in which to respond – 5 days, 10 days, etc.

Document Sales and Use Tax Process. Public companies and companies that must adhere to various financial covenants, will have to thoroughly document their sales and use tax 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.  If outsourcing any of the sales tax process, the vendor should have a SOC (System and Organization Controls) review performed at least annually by an independent third-party.

The process for compliance has many moving parts; your tax calendar isn’t static and as economic nexus standards continue to change, it’s not a one and done task.  It is a lot for any business to keep up with.  

Depending on the complexity of your situation and the materiality of the risk, it
could be beneficial to seek professional help and guidance. When seeking professional guidance, be sure to understand the advisor’s capabilities specific to sales tax and specific to similar situations that you are working through.

Sales tax compliance is clearly a specialty and not getting any easier. If you’re looking to reduce costs, increase efficiencies and minimize the substantial risk of noncompliance, reach out to a sales tax expert. Consider working with TaxConnex^®. Contact us to learn what it means when sales tax is all on us.