Pitfalls of sales tax compliance: returns

April’s federal Form 1040 probably comes first to mind when anyone thinks about tax returns. As your business starts to sell into more states, though, you’re going to need to file another type of form: states’ sales tax returns.

Previously, we looked at the importance of such back-office functions as your general ledger in making sure you stay compliant with sales tax collection from customers (and remittance of the cash to tax jurisdictions). When it comes time to file, what do you have to know about sales tax returns – and what could go wrong?

Could be minutes, could be days

Tax returns get the tax that you collect reported and paid to the jurisdiction. They’re important documents.

And we have a lot of them: 50 states with 50 different sales tax systems and 50 different tax return formats and forms. (Since there is no federal sale tax, sales tax is left up to states.) Some states’ returns have you combine and report one number for the state; others make you drill your filing and tax calculation down to the district, city or county level, which can complicate pulling the information from your billing system. Some returns will take you 10 minutes. Some will take you three days.

Another complication can be returns’ due dates. Returns are typically due monthly, quarterly or annually. In most states, returns are due on the 20^th of the month; some are due on the 15th. Bear in mind that in some states a return due on the 20th might be due on the 19th depending on your payment method. Florida and Texas are tough about this: You can remit your collected sales taxes by debit, but the debit must be submitted the day before the due date.

Some states also now require e-filing. Security around these filing sites is becoming stricter, and it might take more time than you think to assemble your necessary information and to register and file.

Both late filings and missed payments can ignite expensive penalties, but you can head off many of these problems by working out the bugs in your tax calendar.

Care with portals

Nothing’s simple with sales tax, and returns can present some additional problems that can hinder your compliance.

For example, jurisdictions like to give you your information on your state taxpayer portal. Don’t go on your portal and just to file the return; take a minute to look the jurisdiction’s messages and letters to you, including possible questions about your previous returns and even notices of potential enforcement action.

Strictly relying on getting these notices through the postal mail is not going to help: If a notice is on the portal but never came to you through the mail, you’re still liable for its contents. (If you have auto file through third party, what happens when a notice gets posted to that portal? Automated services aren’t looking for these notices.) Check your state taxpayer portal at least monthly.

Other possible problems with filing and returns:

• Two-factor authentication is a handy safeguard for your portal, but it can also be a nuisance and even a danger. Who’s getting that secure verification code that’s usually emailed or texted. Is that person available to forward the code to you? Does he or she even still work for your company?
• In states like Washington, you’re filing a combined excise tax return that includes sales tax and other excise and gross receipts taxes that aren’t necessarily going to spring from data in your billing system. One of biggest is the Washington Business and Occupation (B+O) gross receipts tax, where all your revenue, subject to sales tax or not, must have a B+O tax calculation for Washington measured on the value of products, gross proceeds of sale or gross income of the business.

Returns mean a lot more than just filing.

In an upcoming blog, we’ll look at the potential pitfall of sales tax compliance inherent in inadequate oversight. (Learn more on our webinar “Don’t Test Your Luck: The Pitfalls of Sales Tax Compliance.”)

Everyone who says they’re simplifying sales tax is leaving the hardest parts – and the liability – up to you. Contact TaxConnex to learn what it means when sales tax is all on us.