Pitfalls of sales tax compliance: tax calendars

If your business sells a taxable product or service and has nexus in states, you have a sales tax obligation. That’s clear enough, but as your business evolves and states and tax jurisdictions change their statutes, you have to keep informed and on top of this potential problem.

Last time, we looked at sales tax pitfalls in your billing system. What about your tax calendar?

What calendars do

You’ve collected sales tax; now you have responsibility to report and remit. To do that, you register in various states and other jurisdictions. And with that process, you establish a tax calendar.

This dynamic document is how you’ll stay on top of reporting and remitting taxes monthly, quarterly or semi-annually – a wide array of due dates that you do not want to miss but could easily with an out-of-date calendar.

Outdated and eventually incorrect tax calendars can run your costs up over back taxes, penalties and interest, not to mention disconnect you from a tax jurisdiction, meaning you might not receive enforcement and other critical correspondence from them.

Common errors

Problems we’ve seen with tax calendars include:

• Incorrect and outdated registrations
• Filing frequency changes not applied timely
• Prepayments/deposits not made when applicable
• Missing tax returns – states often require new types of returns for such fees/taxes as retail delivery fees

If you’re a growing business, you could also be activating economic or physical nexus in new states and jurisdictions every month and collecting new taxes. You need to monitor your calendar based on the taxes you’re collecting for jurisdictions but where you haven’t yet registered for remittance. Also be sure that you’re only registering where you have a sales tax responsibility and you’re collecting tax that’s material (meaning more than $5).

You may have register for different tax types aside from sales tax, too, such as seller’s use tax. The type of tax must be reported and filed on the right return. Filing Chicago sales tax on an Illinois return, for instance, or filing the wrong return in a Colorado home-rule city can be expensive.

Some of the most important elements of a good tax calendar are entity names (if you file for multiple entities), a by-state filter, the jurisdiction or name of the return, type of tax, collecting agency, filing frequency, and your tax ID number, among others.

Your tax calendar is a living, breathing thing. Stay on top of it every month and integrate it with your billing system so you know that the sales taxes you’re collecting are associated with a specific return and that those returns are on your calendar.

In upcoming blogs, we’ll look at such other potential pitfalls as G/L management, submission of returns and inadequate oversight.

(Learn more on our webinar “Don’t Test Your Luck: The Pitfalls of Sales Tax Compliance.”)

TaxConnex can help keep your business on top of your taxability and ensure you maintain sales tax compliance. Get in touch to learn how!