The Slippery Slope of Sales Tax
Get firm footing with these 8 audit-ready best practices
Mitigating risk is a big part of running a business. It’s critical to protect the company against any disruption that could adversely impact operations, productivity or profit. Some tactics are obvious, like a security system and insurance policy. You hope you never need either one, but they provide piece of mind. What about a sales tax audit? Can you confidently say you take the same proactive stance to protect your business?
Most companies have a laissez-faire attitude towards sales tax. They just don’t think about it. It’s a necessary activity that doesn’t generate revenue. Yet the financial impact of non-compliance is much higher than you might realize. According to the U.S. Bureau of Justice Statistics, businesses report $4.5 billion in losses from burglaries annually. Uncollected sales tax revenue is five times that amount—roughly $24 billion. And that’s just online sales. The average loss to a small or mid-size business from burglary is $2,000. For that same company, the average cost of sales tax compliance is $24,000, according to Aberdeen Group. With an audit, Wakefield Research puts that cost closer to $96,000.
Sales tax may not be a money maker for you, but it’s a big one for states. And with $55 billion in budget shortfalls last year, they’re coming to collect. It’s no longer a matter of if you will be audited, it’s when. Even the most organized companies are often unprepared for this intense level of scrutiny. Applying these eight best practices can make the process easier and improve success rates:
1. Know where you have nexus
Nexus says that a business must collect state sales tax if it has a substantial physical presence in a state. Recently, nexus laws have expanded to include distribution, independent agents, remote employees and affiliate networks. Next up: Online and remote sales. Be certain you understand where you are required to collect tax and keep up to date on nexus changes to protect against non-compliance penalties.
2. Keep up with product and service taxability changes
Most sales of Tangible Personal Property (TPP) are subject to tax. This has begun to shift to include intangibles, with many states now routinely apply sales taxes to certain services. Digital goods, downloadable software and cloud services have also become subject to sales tax. Keep apprised of product and service taxability as rules evolve and adjust your accounting systems and taxing practices accordingly.
3. Use the right tools to get the right rates
It’s common for businesses to shortcut researching sales tax rates by using ZIP code tools. Unfortunately, taxing jurisdictions don’t always follow ZIP codes. Tax rates can vary even within an individual ZIP code and counties and municipalities can levy sales taxes in addition to state rates. Geospatial mapping is a more accurate method and can calculate sales tax “down to the rooftop.”
4. Track sales tax holidays
Sales tax holidays are specific days when sales tax is not charged on certain products and services, giving consumers an opportunity to purchase goods tax-free. At least 17 states offered sales tax holidays in 2013. Tax holidays vary by type of goods, time of year or length of time, with no consistency state to state. Yet the burden still falls on businesses to track these dates and sales correctly—no matter how daunting the task.
5. Efficiently manage exemption certificates
Not all customers are required to pay sales tax. Depending on the rules in a taxing jurisdiction, certain businesses and individuals may be exempt. If you’re the seller, it is incumbent on you to collect valid exemption certificates, keep them on file and track their expiration and renewal dates.
6. Know where and how to remit sales tax
When it comes to remitting sales tax, businesses must using correct forms and formats for each jurisdiction and meet filing deadlines. This can get complicated with multiple locations and nexus, exponentially upping the odds of missing a file date, rate change or certificate renewal date and increasing non-compliance and audit risk.
7. Be audit ready
The most critical action you can take to pass an audit is to collect sales tax properly over time and ensure that you have properly documented every step of the transaction. Audits are much less painful when transaction history, exemption certificates and other relevant information is readily available. If your practices, calculations and records are in good shape, you should be too.
8. Streamline your process
The more time you spend calculating, collecting, and remitting sales tax, the less time you have to spend on revenue-generating activities. Outsourcing and automation are efficient, cost-effective alternatives to manual processes. Think about it. Most companies outsource payroll. It makes sense to do the same with sales tax. Choose a vendor that will make the transition to automation is as seamless as possible for you. Look for one that integrates with your accounting, point-of-sale, ERP or ecommerce system and provides a full suite of transactional tax services—calculation, filing and exemption certificate management.
Want to know more?
Learn the other side of audit-readiness by reading the 8 ways to INCREASE your audit risk.