With an estimated 11,000 taxing jurisdictions in North America alone, no one could blame any tax accountants for feeling a little overwhelmed at addressing their clients' state and local taxation (SALT) issues. But you don't need to be a SALT expert to talk to your clients about the risks: you can at least make them aware of the potential problems, not only for their sake, but yours as their advisor.
"In protecting your clients from SALT issues, you're protecting yourself as well", said Andrew Johnson, cofounder of Peisner Johnson & Company, LLP, during a session about sales and use tax during AWEbLIVE!, the 12-hour CPE marathon. "You don't want your clients to be burned by a sales tax audit and say, 'Why didn't you tell me about this situation?' It's about being conversational with your clients and having them feel you are the trusted advisor."
Last year, 36 states had budget gaps and they are looking to make up for it by gathering state and local tax that wasn't collected and should or could have been. Some estimate $23 billion in state sales tax revenue was lost by not charging sales tax on remote sales or Internet transactions; Amazon and eBay say it's more like $12 billion, according to figures provided by Ray Bigley, Vice President, Business and Corporate Development, at Avalara.
Most people are aware, to some degree, about the legal battles around taxing Internet sales, but it goes way beyond that. Did you know in some countries there is discussion of taxing products purchased on Farmville? How about the fact that because a Heath bar contains flour, it's considered food and therefore taxable in some jurisdictions, but not others?
Following are a few items to consider talking with your clients about before referring them to qualified third parties:
Nexus. There's a minimum connection your clients must have with a given state for it to be able to collect sales tax, which of course varies not only from state to state, but jurisdiction to jurisdiction—all 11,000 of them.
What are nexus-creating activities? If you own a building you have nexus—that's obvious. But what about remote employees, such as sales people out and about performing sales operations for you, selling goods at a conference, making deliveries in your own vehicle? These are all items that could possibly put clients at risk.
In most states, only certain services are taxable. Professional services usually aren't taxable, but personal services like massages or haircuts are. Sometimes specific locations will have exemptions.
So the first thing to do with your clients is analyze their nexus footprint. Determine what activities create nexus in which states. Avalara has an assessment tool to help CPAs navigate through this, Bigley added.
Encourage clients to err on the side of over-collecting taxes, because if they under-collect and are audited, they'll pay for it out of their own pockets, Bigley said.
Use taxes. Aside from all the controversy about taxing items sold over the Internet, there are other cross-border issues: if you bought something in another state and weren't taxed, you still owe tax on that item. Usually people don't do anything about it, Johnson said. Big fixed assets typically are a red flag. People think they are home-free because the vendor didn't charge sales tax and five years later they could get pinged. If you notice your client made a big purchase, better to bring up the potential risk now. Johnson suggests putting someone from purchasing in charge of tracking possible items that fall into this category. (New York imposes an estimated use tax on residents based on their income as a partial solution to this problem.)
Larger businesses are aware of use tax liability and pay it regularly, but maybe 0.001 percent of individuals voluntarily put it on their tax returns, Johnson said.
Exemption certificates are low-hanging fruit in a sales tax audit, he added. If a business has nexus somewhere and is selling tangible personal property, it needs to be able to show exemption certificates if it isn't collecting sales taxes.
Tax returns. If a client has to file sales tax returns, it is important to note they are generally due every month and must be paid on time. (There are different policies in different states.) Penalties are incurred the day after they're late, typically at 5 percent, according to Johnson. So, if a client owes $1 million in taxes and is one day late making the payments, that comes at a $50,000 penalty.
One final word of warning, Johnson provided: The cardinal sin of sales tax is collecting sales tax and not sending it in…even if it's unintentional, it can lead to criminal penalties. Be wary of this.
The full webinar and slides are available here.
About the author:
Alexandra DeFelice is senior manager of communication and program development for Moore Stephens North America, and a regional member of Moore Stephens International Limited, a network of more than 360 accounting and consulting firms with nearly 650 offices in more than 100 countries. Alexandra can be reached at [email protected].