The over-and-over process of sales tax compliance

Well, it’s Groundhog Day ... again ... – Phil Connors, Groundhog Day

In 1993, a Bill Murray movie quietly appeared about a Pennsylvania TV weatherman who relives the same day (February 2) over and over in the town of Punxsutawney. He’s been sent there, much against his wishes, to cover Phil the famous groundhog whose shadow, year after year, forecasts the end of winter.

In the three decades since, Groundhog Day has become a classic. It’s also safe to say that its storyline of repetition seems to echo what you must do, over and over and over, to comply with sales tax laws.

File, remit, repeat

Watch out for that first step! It’s a doozy! – “Needlenose Ned” Ryerson

There are multiple steps to make sure your sales tax compliance works well. Most of these are not a one-time project, you have to keep doing them.

Tracking your nexus: Nexus is the connection you have between a state or local taxing jurisdiction; it’s determined by either a physical or economic presence. Tracking it isn’t always easy though. Since the Supreme Court’s 2018 Wayfair decision, states have been frequently changing their economic nexus thresholds (see “Changes” below).

Taxability: Once you’ve determined nexus, you need to determine if your products or services are taxable. This can be an easy answer. It can be a hard one, too – states differ widely in taxability laws.

Calculation and remittance: Determining the most effective sales tax calculation process comes with many variables: where you have nexus, the complexity of the taxability of your products or services; whether your invoices are recurring to the same customers each month; and the capabilities and limitations of your invoicing system. Some businesses can manage the calculation of sales tax without separate sales tax software systems, others can’t.

Sending the states what you owe: Your filing and remittance solutions need to accommodate multiple data files and formats, e-file and paper returns, electronic payments and checks, notice management and resolution, tax calendar updates and an audit trail to minimize penalty assessments. This is a pivotal step in your compliance.

Navigating prior-period exposure: If you haven’t been collecting and remitting sales tax but have a responsibility to do so, it’s very possible you’ve developed some prior-period exposure. But there are options, such as voluntary disclosure agreements (VDAs).

Keeping track

That was a pretty good day. Why couldn’t I get that day over, and over, and over ...

The days you get over and over with sales tax are deadline days. Sales tax, unlike other types of taxes, has many deadlines, not once or twice a year, but often every month – usually the 7th, 10th, 15th, 20th, 25th or 30^th, not counting the odd due dates for certain states. Other factors can affect due dates: holidays, state furlough days, natural disasters and sales tax holidays, just to name a few.

Returns are typically due either monthly, quarterly, or annually. Some states have more unusual frequencies, including semi-annual, bi-monthly, occasional, and let’s not forget the weekly prepayments. In most cases, the higher the volume of tax to be reported, the more often you are required to file and pay. (Some jurisdictions take prepayments, which are often for larger amounts and on a different filing schedule.)

Because of all of these complexities, it’s critical that you maintain an accurate tax calendar that reflects where your business is registered for sales tax purposes, the filing frequency of each return, the e-file login credentials and other information. Otherwise, keeping track of filing dates can certainly feel like an endless and confusing series of the same tasks.

Changes galore

Chance of departure today: 100 percent!

Ironically, when every day brings changes in sales tax laws, every day is the same in that you have to deal with the endless changes.

Yet again, this looks to be a busy year for sales tax:

• Weakening state tax revenues and diminishing post-pandemic surpluses could produce more and higher rates and intensifying audits. Only seven states are forecasting growth exceeding 5%; eight forecast declines.
• Colorado recently introduced a contentious fee on all retail deliveries in the state where at least one tangible personal property item is subject to sales tax. Other states such as Minnesota and New York are pursuing their own delivery fees, with others sure to follow.
• In the Not All News Is Bad Dept., economic nexus thresholds that mushroomed after the Wayfairdecision may be easing. Those thresholds have generally been based on dollar volume of sales in the previous year or number of sales into a state in the same period, or, frequently, both. Recent years have seen states whittle their transaction thresholds.
• Some time ago, politicians found that sales tax holidays garnered strong public support. A myriad of holidays in many states pop up year after year on everything from baby diapers and school backpacks to emergency supplies and gun safes. Sales tax exemptions also continue to expand on such items as groceries even as new sales taxes are levied, especially for digital products.

This is only a snapshot of the sales tax changes likely in 2024 – just another typical year in sales tax.

Don’t let sales tax compliance overwhelm you. Don’t let sales tax compliance overwhelm you. Don’t let sales tax compliance overwhelm you. Contact TaxConnex to learn what it means when sales tax is all on us.