SALES TAX SURVIVAL GUIDE
SALES TAX SURVIVAL GUIDE
Until recently, sales tax received little media attention outside of the tax and compliance arena. Then large states like California and Texas enacted laws requiring online retailers such as Amazon to collect sales tax for the first time. Soon other states followed suit. A similar shake-up at the federal level is pending: The Marketplace Fairness Act of 2013 gives states permission to require sales tax collection from all remote sellers, if the states can streamline their sales tax processes. Considering the already impenetrable maze of sales tax collection rules, businesses face an uphill battle this year. Sales tax compliance in 2013 requires more resources and expertise than most small to midsized businesses possess. This Sales Tax Survival Guide will help you: • Understand the challenges and risks associated with managing sales tax compliance. • Develop strategies to help you survive sales tax challenges. • Know which state and federal sales tax changes will impact your bottom line.
SALES TAX CHALLENGES
So what exactly is sales tax?
1. Sales tax
Sales tax is a tax charged at the point of purchase for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale. A portion of the sale may be exempt from the calculation of tax because sales tax laws usually contain a list of exemptions. The seller collects most sales taxes from the buyer and remits the tax to a government agency.
2. Use tax
Use tax is a tax imposed on a consumer for the storage, use, or consumption of tangible personal property (TPP) when sales tax was not paid on the original sale. Use tax is the complementary tax to sales tax and is typically assessed at the same rate as any sales tax that would have been owed. Purchases made over the Internet and out-of-state are the most common types of transactions subject to use tax. Use tax must also be paid when a business withdraws goods from inventory for its own use, if sales tax was not paid on those items at the time of purchase. Unfortunately, this is only the beginning of the sales tax survival challenge in 2013. Current state and federal proposals to change remote sales tax collection requirements add to an already difficult compliance environment for businesses.
WHY STATE AND FEDERAL CHANGES WILL IMPACT YOUR BOTTOM LINE THIS YEAR
It doesn’t take a policy expert to gather from headlines that states are actively crafting laws requiring online retailers to collect sales tax. What many businesses don’t realize, however, is that remote sellers such as distributors, manufacturers, and multi-level marketers might also be impacted. Cities, counties and states regularly change these rules, making sales tax compliance nearly impossible for most businesses. These changes often include: • Product and service tax exemptions. • Sales tax holidays. • Boundary adjustments. • Rate increases or decreases. Managing these changes is made more difficult by the state and federal changes detailed below.
“Amazon Laws” and new requirements for remote sellers
“Amazon Tax” or “Amazon Laws” describe state laws enacted to compel online retailers to collect sales tax, under certain conditions. The states with Amazon Laws in place are highlighted in yellow in the following graphic. Calling these laws “Amazon laws” is misleading since they apply to all remote sellers—defined as a businesses without significant physical presence in another state and that sells to customers using the Internet, mail order, or telephone.
Federal proposals would change sales tax collection and enforcement
Many online retailers and other remote sellers do not currently have to collect sales tax in states where they have no physical presence. States struggling to recover from economic recession see this uncollected tax as a major source of revenue. A well-known University of Tennessee study estimates that in 2012 state and local governments would lose $11.4 billion in potential sales and use tax revenue from e-commerce. . That number jumps to $23 billion when catalog, phone and all other untaxed transactions are included. Furthermore, brick-and-mortar retailers argue that their online counterparts enjoy an unfair price advantage when they don’t have to collect sales tax. The Marketplace Fairness Act of 2013 grants states the authority to compel out-of-state online sellers to collect sales tax at the time of a transaction, just as
} States that have Amazon laws
local retailers are required to do. Under the proposed legislation, out-of-state sellers that make more than $1 million in gross receipts annually would collect sales tax in states as long as the states simplify the process, though this threshold is likely change if the bill becomes law. On average, sales tax compliance costs small and midsized businesses three to 15 cents per sales tax dollar collected. According to the U.S. Census Bureau, failure to account for that expense is one of the principal causes of small and mid-sized business failure in the United States. Why? The components of this compliance expense are difficult to pinpoint and often overlooked. The costs are hidden in staffing, compliance, accounting systems, information technology, and other business infrastructure. In addition, sales tax compliance is a pass-through activity that adds no value to the bottom line. Sales tax collection requires your business to act as an agent of each state in which you have nexus and collect and remit sales tax accordingly. And if you don’t do it correctly, accurately and on time, your business can face heavy fines and penalties. The following survival tips can help you meet some of these challenges in 2013.
SALES TAX SURVIVAL TIPS
1 Determine which jurisdictions can apply sales tax on your business 2 Establish which products and services are taxable
Does sales tax compliance apply to your business? That depends upon a set of regulations known as nexus rules. According to a series of Supreme Court decisions that culminated in Quill v. North Dakota, an out-of-state business must collect sales tax on behalf of the state, if it has a substantial physical presence in that state. Unfortunately, the Court did not define “substantial physical presence,” so each state has established its own set of regulations. Examples of nexus-creating activities include: holding a business license, owning tangible property or establishing a headquarters in a given state. By doing these things, a business agrees to be an agent of that state to collect sales tax and remit the funds back to the government.
Many states are addressing budget gaps by increasing product and service taxability. Your business must determine which items require tax, and capture variations arising from the location of the sale. While most states don’t collect sales tax on grocery items, many do tax processed foods that contain certain ingredients. Service taxability varies greatly from state to state. States like Delaware, Hawaii and Washington tax a large number of services; other states such as Alaska, Virginia, and New Hampshire tax very few. As taxing jurisdictions change their rules about taxability of goods and services, your business is required to adjust your accounting systems accordingly.
SALES TAX SURVIVAL TIPS
3 Apply the correct tax rate for the jurisdiction 5
Remit sales tax to the controller’s office according to statutory deadlines
Don’t make assumptions about geography. Many businesses make the mistake of searching for the correct tax rate by ZIP code, assuming this will give them accurate information. Unfortunately, taxing jurisdictions do not follow ZIP codes. Geospatial mapping, on the other hand, can pinpoint each location against a specific taxing jurisdiction.
For each taxing jurisdiction, a business must meet filing deadlines and provide timely remittance using correct forms and formats. This step sounds simple. And for many businesses it may be easy, especially those with only one location. In this case, the business would be responsible for collecting sales tax at the rate applied in its home city. Things grow more complex when the business adds a location. And then another. With each new city or state, there are a host of new guidelines addressing filing and remitting.
Collect the appropriate sales tax exemption certificates from customers
Not all customers must pay sales tax. Depending on the rules in your taxing jurisdiction, certain businesses and individuals are exempt from sales tax. It is incumbent on the vendor to collect and keep on file a valid exemption certificate. You must ensure that exemption certificates are valid for each sales transaction. This requires your business to keep a copy of each exemption certificate. For easier accounting, a database or spreadsheet of exemption certificates should be easily accessible. The best solutions tie directly into your point-of-sale system, making it simple to verify that exemption certificates are current, valid and on file.
PREPARATION & PROTECTION OF ASSETS
Why it’s important to remit sales tax correctly
Some businesses mistakenly believe that if they don’t make major mistakes they will not be audited. That is incorrect. Audits are often prompted by external causes, such as revenue shortfalls or changing tax rules. States are becoming increasingly aggressive in auditing businesses. Most states use a formula to determine which businesses will be audited. The state examines the results of past audits to see which industries, business sizes and types had the most compliance issues. Other triggers include Internet-only businesses, as well as those selling clothing, food, software, electronics and digital media. Here are a few actions that can cause greater compliance scrutiny: 1. Nexus — Nexus triggers include: having out-of-date rates and rules, failing to recognize new rules that create remote seller nexus, or using error-prone manual processes to manage complex sales and use tax laws and rates. 2. Exemption / reseller certificates — Exemption certificate-related practices that might increase your risk of an audit: inability to quickly generate a summary report, inaccurate, incomplete and missing certificates, or expired certificates. 3. Filing and remittance — Filing errors that might increase your risk of an audit include failure to prepay where required, late payment, or payment to incorrect jurisdictions. 4. Product and service taxability — Remember to update product and service taxability as rules change and new products and services are offered.
An auditor reviews a sample of 20 transactions in which no sales tax was collected. Exemption certificates for four of those transactions are not on file and immediately available. The auditor can extrapolate the results of that sample and claim that 20 percent of your company’s non-sales-tax transactions are invalid. Those taxes would then be assessed, as well as penalties and interest.
COMPLIANCE RISKS & HOW TO NAVIGATE THEM
To survive an audit, the most critical action a company can take is to collect sales tax properly over time. But following every rule will not help your business unless you have properly documented every step of the way. Audits are much less painful when good documentation, such as transaction histories, exemption certificates and other details are at your fingertips. To effectively comply with sales tax regulations, you will need cooperation from several areas within your business: • Accounting tracks and applies sales tax statutory changes across every jurisdiction where your company does business, as well as create and maintain detailed records of sales tax compliance activities. • Sales helps determine whether new locations or accounts will bring associated sales tax compliance issues. • IT makes changes to accounting systems and e-commerce systems, plus allocate adequate electronic storage for compliance records. Unfortunately, addressing sales tax compliance manually is inefficient, error-prone, and detracts from revenue-generating activities. Well-run businesses understand that a sales tax strategy is not simply about accuracy, especially given that 100 percent accuracy in sales tax collections and remittances is next to impossible. While accuracy is obviously important, efficiency is paramount. There must be a balance between the two. Imagine a company that runs a chain of donut shops. The team members at that company want to delight customers with tasty donuts and make a profit doing it. They don’t want to become experts on the taxability of donuts in each state.
So how can a business make the sales tax compliance process more efficient, while also minimizing the risks inherent in compliance?
Automation and outsourcing.
AUTOMATION IS THE KEY TO SURVIVAL
Given that manual sales tax compliance tasks do not generate revenue and drain scarce resources, and that inaccurate management has severe results, automating and outsourcing the process makes sense. Rather than create policies, procedures and records from scratch, thousands of companies choose to fully outsource their sales tax compliance program. Fully automated solutions are available both on-premise and hosted (in the cloud). The most efficient way to automate is by choosing the hosted model, where a sales tax compliance vendor integrates into existing accounting, point-of-sale, ERP, and other technology systems. In addition, the vendor tracks your company’s data as needed, including exemption certificates, sales tax liability data and more. With a fully hosted solution, it’s simple for your team members to get immediate access to critical data any time or anywhere. In addition, outsourcing the sales tax compliance function shifts your company’s risk to a third party. For example, the Streamlined Sales Tax Project certifies Avalara. As a result, Avalara clients are protected from penalties and interest if any mistakes in sales tax remittances occur. To avoid liability in an audit, your business must demonstrate that great efforts were made to comply with sales tax regulations. At a time when businesses are trying to do more with less, utilizing staff time to stay compliant with multi-jurisdictional sales tax collection requirements is a poor use of resources. A better strategy is to automate and outsource the sales tax collection and remittance process. Even small organizations can shift their risk to a third party and remove the negative impact to sales and resources, while also streamlining the entire sales tax management process. No system is absolutely foolproof, but with a detailed process in place, an auditor is more likely to give your company a clean bill of health.
WHAT CUSTOMERS ARE SAYING
From a compliance standpoint, taking most of the responsibility off your shoulders and putting it onto a company whose on-demand calculation is pretty accurate, I would definitely recommend it. We used to have one staff accountant who was doing every single return and it was just way too time-consuming. At the time, we only had seven states. Now, we’re up to 25, so we’re really glad we went with AvaTax Returns. ~ Anthony Carter, ERP Analyst at ESET North America
I was managing all the sales tax rates and it was a lot of work. It was also very difficult to get the reports that we needed to file the sales tax returns. That’s when we decided we should automate and look for a sales tax solution. We didn’t want to have a server in-house to support. One of the other sales tax solutions we were looking at was also a lot more expensive. AvaTax just seemed more cost-effective and we liked the idea that it was hosted. ~ Danielle Jaworski, Controller at Breitling USA
Our biggest audit hit was the exemption certificates and the notax sales. So we decided to go with AvaTax Certs. We really feel strongly that it is going to be a good tool for us to help with audits, to reduce our liability with states, to reduce the frequency of state and multiple jurisdiction audits. We needed to outsource part of our sales tax to make sure we were compliant. Avalara had what we were looking for. Everything fit. ~ Heather Gravelle, Sales Tax Manager at Furniture Row
HERE’S WHAT YOU CAN DO
Understanding the implications of recent state and federal rule changes and addressing the onerous task of complying with the ongoing jurisdictional statutory changes need not expose your company to audit risk. You can address this today.
1. Contact Avalara for a custom analysis of your potential sales tax collection requirements in all of the jurisdictions in which you currently operate or into which you plan to expand. 2. Take the next step toward automating your sales tax process. CALL: 877-780-4848 VISIT: www.avalara.com/products/avatax
Founded in 2004, Avalara pioneered a service-based platform for sales tax and compliance automation and has been recognized for years as one of America’s fastest growing technology firms. The company’s cloud solutions help thousands of customers stay focused on their core businesses by providing automated end to end compliance services including sales and use tax calculation, exemption certificate management, filing and remittance, and a broad array of related services.
Fast. Easy. Accurate. Affordable.
End-to-end sales tax compliance solution.
STORAGE & RETRIEVAL
FILING & REMITTANCE
TAX DECISION SOFTWARE INTEGRATION
Real-time access to the most current rates and taxability rules within any ERP or billing system. AvaTax dynamically delivers 100,000+ taxability rules and applies them across 11,000+ jurisdictions at the point of transaction, within any ERP or billing system.
Limit your non-taxed transaction audit liability. Ensure that valid certificates are immediately accessible through electronic collection, storage and management.
Ensure timely and accurate transactional tax filing and remittance - with simplicity. File returns and remit payments on time using a single payment solution. Whether the jurisdiction requires e-filing or mailed in hard-copy returns, Returns performs the job.