My last blog discussed why the most costly sales and use tax compliance errors are timely filing of returns and payments, and knowing your requirements to file or pay electronically. There are three additional sales tax compliance factors that can cost you big as well --- changes in your filing frequency, new prepayment requirements, and timely response to notices. As your business changes, so can your sales and use tax compliance requirements. Whether it is from growth, acquisition, adding a new product line or no longer selling a certain product line, these business changes can all lead to a change in your filing frequency and prepayment requirements.
Filing frequency changes – As your business grows and changes, so can your filing frequency. For example, you may have been given a filing frequency as a quarterly filer when you first registered. As your business and tax liability grows, the jurisdiction may require you to file monthly. Not changing your filing frequency can put you in jeopardy of not filing and paying a return on time. This can also provide reconciliation nightmares with the jurisdiction and your own accrual account, which can take up valuable time and costly penalties and/or interest can accrue. The jurisdiction may also expect an amended return to get you back on track.
New prepayment or changes to existing prepayments – The more money you collect, the faster the jurisdiction will want to have access to it. Just like with filing frequency changes, as your business changes, so can the requirement to file prepayments. The best way to describe a prepayment is to think of it as a deposit. In some states they may require you to file quarterly, but you make monthly prepayment for months one and two. Other states may require you to prepay for a specific period or more than once a month. The requirements vary and can all have different thresholds and calculation methods. Depending on the data you have available and cash flow, these prepayments can be difficult to manage and the calculations hard to understand. Timeliness and accuracy is everything here. Again, if not done correctly, penalties and/or interest will be hard to avoid.
Timely response to notices – Do you know where your mail is going? – Most states will send you a notification if there is a new requirement with your sales tax account. Sometimes these come in the mail or are posted within the jurisdiction’s electronic filing system. I recommend paying particular attention to your notices and understand how the mail is being routed to the tax department or individual responsible. I hear all too often that a company did not receive a notice either because the notice went to an old address or to a person who is no longer there, or the notice was simply not read in the electronic system. Understanding how the jurisdiction is communicating with you and making sure that your address, email, phone number and contact information are kept up to date is crucial to the compliance process.
Additionally, pay attention to the content of the notice, so that you clearly understand what the notice is for. Sometimes these can be ambiguous, if you are not certain pick up the phone and call the jurisdiction so you know specifically what the issue is and how it can be resolved. Also check if there is a specific time period that you must reply by. In some jurisdictions, if you do not respond by a certain date, then you forfeit your right to appeal. You do not want to be known as a taxpayer with a poor reputation, because some jurisdictions will garnish payments or post to the media when taxpayers are not compliant. You want your business to be known for their products, services and solutions, not for being a non-compliant tax payer.
It is important to keep a tax calendar so that you or anyone responsible in your absence understands the due dates, prepayments, how a return needs to be transmitted (paper vs. electronic), how a payment needs to be remitted (check, ACH Credit, ACH Debit, Credit Card, etc.), filing frequency, user name and passwords. Being compliant with your transaction taxes is a must and can be very costly if not done timely and accurately. If you do not have the resources, time or expertise, the alternative of outsourcing your compliance may be right for you.