Interpreting sales tax laws, rules and regulations is not something that can be automated. It takes a specific lens to understand past, present and future activities that impact sales tax liabilities and create risk. That risk is in the details, which is also where reducing that risk starts.
Sales tax automation tools are prospective in nature, supporting elements of an ongoing sales tax compliance program going forward. Automation tools do not, however, account for what has been done in the past or fix mistakes. Moreover, interpreting sales tax laws, rules and regulations cannot be automated.
For that, businesses need a 360-degree lens to understand activities that impact sales tax compliance and create risk. This means paying particular attention to areas captured below. The following tasks are in no way comprehensive or exclusive. Get started right by contacting your TaxOps advisor so that management can make key decisions about how to comply now and into the future.
Prepare for Compliance
Legal and Practical Considerations in Determining where to Comply
Review the company’s process of controls, including how sale orders are generated and put through the compliance process. Tap the sales team to understand market presence and more fully understand the way a sale is generated as well as the documentation required to flow through to accounting. Enlist the sales team to help the accounting and finance team manage risk and compliance.
Gather information for filing the right forms, including gross revenue and the number of transactions in states where sales are remote. Then create a plan to register, collect and remit—either via a marketplace or with a hosted or cloud solution.
Nexus, Exposure and Taxability Review
Avoiding sales tax obligations is not cheaper than compliance and creates risk that can be hard to pinpoint. Identifying exposure starts with a streamlined nexus study. This helps businesses understand how revenue is generated and how the business makes their money. A nexus review also makes it easier to see relative risk across the country and determine the requirements that must be meet. Focus first on larger states where a company has more business going on. This might include highly populous states such as California, Florida, Illinois, New York and Texas.
Negotiating Remediation and Penalty Abatement Proceedings
For businesses that have failed to do the right thing, consider the need for voluntary disclosure agreements (VDAs) in states with effective dates that have already passed. Every state in America has VDA opportunities, except New Mexico, which offers a payback plan with a limited lookback, allowing businesses to reduce taxes, interest and penalties.
Texas has the best VDA program in country. In the Lone Star state, providers work directly with a person who has authority to create a workaround without getting caught up in the clerical system. The savings in back taxes and non-compliance costs from a VDA can easily be 10-times the amount a business pays a provider to get the agreement done.
Create a “culture” of compliance across the enterprise from the sales team to the accounting department. Compliance is a company wide effort to effectively manage multistate duties. No company should be eating a customer’s tax due to improper documentation, or not properly taxing a transaction at the time of invoice. These efforts will serve to prevent future remediation or penalties.
Establish a Sales Tax Compliance Filing Process
The “easy” part of sales tax compliance is putting the numbers on a return and filing those returns to various jurisdictions. There are, however, multiple factors to consider highlighted in the following checklist.
Sales Tax Compliance Filing Checklist
- Manage Tax Data Reports
- Maintain a Tax Calendar
- Prepare for Filing
- Handle Notices
- Document Sales and Use Tax Process
Manage Tax Data Reports
In a perfect world, all sales tax calculations are managed in one system and a single report can be produced each month providing details of all the sales and use tax liabilities. As businesses grow, though, they acquire other businesses, they change their accounting systems, and they launch new e-commerce platforms – all resulting in different sales tax processes. Each of these iterations and sources of sales tax information will need to be incorporated into the filing process and require mapping for disparate data to the individual return(s).
Maintain a Tax Calendar
It is critical to maintain an accurate tax calendar that reflects where a business is registered for sales tax purposes, the filing frequency of each return, the e-file login credentials, and other state-specific information. This tax calendar is not a static item; it must be maintained and updated over time as filing frequencies change or a business needs to register in additional state or local jurisdictions. Keep an eye out for notices from state and local governments, as they may require a change to your tax calendar.
Prepare for Filing
Be prepared to file both online returns and paper returns. Most states require an online filing with an electronic payment. Local jurisdictions, however, often require paper returns with a check. Some businesses struggle with the internal deadlines to have checks or payments authorized in a timely fashion. Unfortunately, the jurisdictions will not adjust their due dates based on internal resource limitations.
Jurisdictions enjoy sending mail. For example, a jurisdiction may send a notice of a change in filing frequency from quarterly to monthly. Missing this change and skipping two monthly returns will result in a penalty. Additionally, jurisdictions may send a deficiency notice that requires an issue to be resolved. These deficiency notices generally have very tight time frames in which to respond – 5 days, 10 days, etc. – so put in place a process to take the guess work out of responding.
Document Sales and Use Tax Process
Public companies and companies that adhere to various financial covenants must thoroughly document their sales and use tax process including the various controls in place that ensure the process is executed effectively each month. These controls must be reviewed periodically and tested to ensure proper operation. If outsourcing parts of sales tax process, the vendor should have a SOC (System and Organization Controls) review performed at least annually by an independent third-party.
Move Forward with Confidence
Wayfair is everywhere. Calculating sales tax is now a critical business process. Education and experience are needed in this area to fully understand the idiosyncrasies in state and local tax. By executing these steps, businesses will be much better equipped to handle tax compliance in the wake of Wayfair.
Each state has different laws, rules and rates, so businesses must manage their own processes and liabilities, whether they are a marketplace provider or not. Get ahead of potential issues by familiarizing your team with state-specific policies and create a culture of compliance top to bottom.
Working with a qualified sales tax consultant through each facet of compliance, management can gather and use their insights to make key decisions about how to comply. If you need help or guidance with any part of the lengthy sales tax compliance process, reach out to the professionals at taxops.com.