It may be the season of ghosts and goblins, but sales tax obligations last all year, and as many would admit, keeping track of all your sales tax obligations can be quite scary.
Once you add in the threat that you could receive a notice of audit at any moment and it may not be just your company at risk, but you personally (due to responsible party laws), it can be downright terrifying.
A frightening threat
What’s your shield when the sales tax monster comes after you? Preparation, paperwork and a working knowledge of the sales tax rules and how they apply to your business is a great start. But why should you care? Let’s say you are selling a product and/or taxable service in a jurisdiction where you have nexus but are not taxing your customers. In the first year, your company’s sales total $10M and grow 20% annually over the next three years (totaling $36.4M in sales). With an average sales tax rate of 8%, that’s more than $2.9M of tax you should have collected. Add additional penalties and interest assessment and your total exposure can top $3.8M!
If your company sells into multiple states and has established sales tax nexus, it is critical that you evaluate your exposure ASAP. Many of America’s more than 10,000 taxing jurisdictions have their own unique rules and interpretations of your obligation.
Most businesses have some type of process in place but it may not be comprehensive enough. Here are tricks that will give you a better chance of staying out of a sales tax haunted house.
A nexus review. Nexus is determined by a physical presence or economic presence in a state or jurisdiction. A complete nexus review to understand your current footprint is a great way to start the process toward compliance. It’s also key to monitor nexus thresholds throughout the year to be sure you haven’t triggered nexus in new states as you grow in sales, employee size or products and/or services.
Understand your exposure. If you fail to collect and remit the applicable sales tax, under audit a jurisdiction will assess the tax due (plus penalties and interest). If your business has previously established nexus and hasn’t been collecting sales tax, it is best to stay ahead of this and estimate your prior period exposure before an audit notice appears. This should encompass all periods where you had nexus and taxable sales but weren’t in compliance. Look at your potential exposure going back seven years – typically as far back as most states will pursue unpaid sales taxes (although they can go back further). This gives you a chance to mitigate and look for options to correct an issue before it becomes an ever bigger problem.
Determine if a VDA is right for your business. A Voluntary Disclosure Agreement (VDA) is a legal means for taxpayers to self-report back taxes owed for income, sales, property and other taxes. In exchange for voluntarily reporting the tax due, states generally grant a waiver of penalty and a limited look-back period (generally three to four years). Though often effective, VDAs aren’t necessarily the best option for everyone.
Register with appropriate states. Before you start collecting and remitting sales tax, you need to register with the applicable jurisdictions. Through this process, the jurisdiction grants a license to collect the sales tax on their behalf. Registering to collect and remit sales tax generally requires submitting basic business contact information (though this can vary state to state), including a list of corporate officers, their Social Security Numbers and phone numbers.
Create a process. Your sales tax permit/license greenlights you to collect, file and remit sales and use tax in your registered states. And remember: Maintaining a sales tax compliance process isn’t a one-time project. Whether you manage the process in-house, work with a software vendor or outsource completely, there are many decisions and pieces along the way.
Don’t let sales tax spook you – outsourcing sales and use tax management to an expert can save your business time, money and stress. Contact TaxConnex to learn how we can help.