By Brian Greer, partner and chief revenue officer with TaxConnex
TaxConnex is a premier sponsor of the PICPA.
If you are a business with customers in one state, your sales tax obligation is most likely limited to that one state. If you are a business with customers in multiple states, your scope and risk grow exponentially with the number of states and the sales tax complexities in those states. In order to comply with this tax responsibility, businesses must incur costs of staff, processes, technology, and experts. The materiality of these costs depends on the scope of sales tax compliance (i.e., number of states and transactions) and the amount of risk you are willing to take (i.e., partial or full compliance).
Sales and use tax obligations begin by understanding in which states you have nexus. Sales and use tax nexus is defined as the connection between a person or entity and a taxing jurisdiction. It is the basis for all your sales tax decisions because, without sales tax nexus, you have no further sales tax obligation to a state.
Nexus is determined by either a physical or economic presence. A company’s physical presence is based on a series of factors, including, but not limited to, office and employee locations, storage of inventory (warehouse location), sales representatives traveling, and outsourced contractors. Economic presence was established in 2018 by the U.S. Supreme Court Case, South Dakota v Wayfair, and is based on the amount of revenue and/or the number of individual sales into a specific state or jurisdiction. The thresholds established by many states is $100,000 in revenue or 200 transactions into the state. But there is a good bit of variability from state to state.
Nexus determination and upkeep is just one part of the sales tax compliance process. There are other considerations as well:
- Are your products/services taxable? Some products are exempt in some jurisdictions, but this differs by state and jurisdiction. You need to check the state rules where you expect your sales will be greatest.
- How will you charge sales tax? After determining where you have nexus, you must decide how to calculate sales tax. You have to examine the complexity of your company’s products and services to tell how complex a system you need to calculate sales tax. In some situations, you may need to purchase sales tax specific software. In other less complex situations, you may only need a tax rate service to facilitate the sales tax calculation.
- What is your exposure due to noncompliance? To calculate the exposure, identify your revenue streams by product/service category by state. Based on the taxability of the products/services and an average tax rate, you can estimate your exposure. By understanding previous exposure, you can decide how to move forward in the future, whether that is through a VDA or simply registering and complying prospectively.
- How will you file and remit your taxes? Each month, you will need to gather the applicable sales tax data and prepare and file the returns. You will need to determine the best option for paying the jurisdictions. You will need to maintain a dynamic tax calendar to show where your business is registered for sales tax purposes and your filing requirements. And you will need to set up a process to retain, track, and respond to correspondence from tax jurisdictions (there will be a lot of it).
The on-going sales tax compliance process is time-consuming and requires regular upkeep. Can you manage it with your already overworked and stressed finance department? To manage it correctly, will you need to hire new staff for only sales tax?
Outsourcing can take the pressure of sales tax compliance off your employees. It can improve efficiency and accuracy while freeing resources to focus on other, higher-value tasks, though it does often take time to find the right resource. Focus on an expert in the field and someone who can provide a service catered to your needs and ensure your compliance.
If you’re looking to reduce costs, increase efficiency, and minimize massive risks of noncompliance, reach out to a sales tax expert to best understand how to proceed.
Brian Greer is a partner and chief revenue officer with TaxConnex. Greer helps companies manage their sales tax risk by implementing sales tax outsourcing services and advising them on sales tax issues related to nexus, taxability, audits, and voluntary disclosure agreements. He can be reached at firstname.lastname@example.org.
For more information on managing the complexities of sales tax compliance, make sure to check out TaxConnex’s PICPA webinar on March 31.
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