Sales tax processes – beyond software’s promises

Automated sales tax software promises to manage your filing and payments, but there’s more to sales tax compliance.

Nexus and taxability

Even before the Supreme Court’s Wayfair decision five years ago, states had nexus thresholds, often hinging on a company’s physical presence in a state (offices, warehouses, personnel). Wayfair opened the way for all states with a statewide sales tax to now have economic nexus thresholds set by dollar amount or volume of sales. In Missouri, for instance, one of the latest states to enact economic nexus, $100,000 in sales into the state in a year ignites economic nexus and your obligation to collect Missouri sales tax from customers and remit it to the state.

Do you sell enough into a given state – and states’ rules all differ – to have economic nexus? That question also depends on the taxability of your products or services. States’ rules differ here, too. If you sell items considered tangible personal property, they’re likely taxable for sales and use tax purposes. Similarly, services are generally exempt unless stated otherwise, though this is changing in some states. Many states’ rules don’t even address how some digital products are taxed, such as Software as a Service.

Registering

Sales tax registrations are completed in each state where you’ve hit nexus. As part of the registration, you are provided a sales tax ID number and are granted the authority to collect and remit sales tax. Again, each state has its own set of rules for which companies must file based on certain filing frequencies and methodologies. You need to be prepared to provide such information as the date when you started conducting business in the state and complete contact information for your business and its owner(s).

Data

Your sales tax compliance depends on data, and that data should be consistent. Inaccurate or incomplete data can lead to inaccurate return filings and ultimately notices and increased risk.

To ensure consistency, automate the data file generation when possible; streamline file identification (names) in the data; and generate the data from a single source. Review the files for each filing period to make sure data are present. Tie the data back to the source via a control total (where you have a record of your tax liability, such as in your GL).

Notifications

Tax jurisdictions love to send notices. Many notices are routine. Some are not and require timely action on your part, perhaps to answer questions about one of your returns or your tax liability. Miss the deadline to respond and you might incur penalties.

One wrinkle to this management is that notices arrive in varied ways: by mail or email, for instance, or are posted to your account on the jurisdiction’s website. Your person in charge of notices must know where to monitor and how to respond and have access to all jurisdictional sites.

Tax calendar

Your calendar shows where you collect/remit sales tax, when and where you file in each jurisdiction, e-file login credentials and other information. This calendar must be maintained and updated as filing frequencies change or, more likely, your business must register in more states or local jurisdictions. As with managing notices, this is a time-consuming but critical task.

Refunds

At least one in every five products ordered online is returned, versus maybe one in 10 bought in a brick-and-mortar store. And you have to refund the state or local sales tax that you charged on the purchase, and that requires you to verify many details: How much did you charge the customer in sales tax? Where was the sale made (and did it incur sales tax based on destination or origin)? When was the return made? Have you already filed your sales tax return based on the original amount of sales tax charged?

Exemption certificates

Depending on the item and the buyer, you may also have sales tax exemptions, which require a certificate for proof. Managing these is a key part of your recordkeeping, as they demonstrate why you did not collect sales tax for a given customer.

Audits

Your business could incur a sales tax audit for several reasons: your industry; one of your customers being audited; a disgruntled employee. Sometimes audits purely happen by chance. Whatever the reason for the audit, preparation is your best defense.

Any documentation should be well-organized and easy to interpret by an auditor; it’s important to assess your own records after being notified of an audit and make every attempt to identify your exposure before the audit.

Always treat an auditor respectfully and if possible assign just one person from your company to manage the relationship – and the flow of information – with the auditor. Disclose insignificant items proactively, which can show that you are willing to help the process, and work with the auditor to understand their thought process and decisions. You may have room for negotiation before the final assessment.

Clearly there’s a lot involved in sales tax compliance. Need help with your sales and use tax obligations? Get in touch to learn how we can alleviate the burden and risk of compliance for you and your business.