In what offers the faint hint of another area where accountants can assist small and midsized (SMB) clients, a government and business study has found that the costs of complying with state sales tax regulations is a financial burden for all retail businesses and hits especially hard on the smallest. (Note - this article reflects information from a 2006 study.)
Businesses of all sizes combined pay an average of 3.09 percent of the sales taxes they collect just to comply with remittance and reporting rules in the states where they have transactions, and the portion is a whopping 9.08 percent average for businesses with $150,000 to $1 million in annual revenue, according to the study by a group of retail industry interests assembled under the auspices of the Sales Streamlined Tax Project (SSTP), a consortium of state revenue departments developing uniform methods to levy and collect sales and use taxes across their borders.
While tax return preparation, where accountants are already active, is the largest individual cost factor in retailers’ compliance, the documentation of tax-exempt transactions, an area in which accounting firms can naturally provide additional help, was the second largest cost factor for the smallest retailers, accounting for an average of 3.8 percent of their total sales taxes collected.
The results underscore an issue familiar in the accounting profession. Many tax practitioners note that sales tax compliance is a growing problem, particularly advising clients on when business activity outside their home jurisdiction is taxable or exempt. While small practitioners are hearing more questions in this area, some large firms have practices dedicated to sales and use tax compliance.
“There’s always a disconnect in the sales and use tax process and for SMBs it can be burdensome,” said Marc Hyman, director of the American Institute of CPAs' tax division. “Tax compliance becomes more of an issue when companies do business in multiple states and have multiple tax climates to deal with,” added Mark Fishman, a partner with Cane & David in Marietta, Ga., whose retail clients range in size from start-ups to about $70 million in annual revenues.
To be sure, the study was not intended to be a practice management advisory to CPAs, but rather to draw attention to the SSTP’s mission to reduce the burdens of sales tax compliance felt by retailers and the states. "This survey marks a significant first step in determining how much it costs retailers to comply,” said Joe Huddleston, executive director of the Multistate Tax Commission, an SSTP member and co-chair of the committee that the SSTP assembled for the study, which was conducted by PricewaterhouseCoopers.
Some of the accounting profession’s work in sales tax compliance has focused on helping clients determine when they trip nexus, the factors that can make them responsible for collecting and remitting sales or use tax in a specific jurisdiction, or dealing with audits after the client has unknowingly tripped a nexus. There are approximately 8,000 different taxing jurisdictions (state, county, city and local) in the nation and some 3,000 tax code revisions are made per year.
“The ability to respond to nexus gets to be a serious problem for small companies when they are forced to grow to survive, and in a very short time expand from operating at one location to doing sales in ten or eleven states,” said Dennis Hobbs, a director in state and local tax services at the Charlotte, N.C. office of RSM McGladrey, which has a national sale and use tax compliance practice. “Sometimes they don’t even know they have a tax issue in other states until it becomes a serious and expensive problem.”
Indeed, a tax partner at another national firm noted that one of his clients, a $4 million sales and services firm, was caught totally off-guard when a revenue department audit in a neighboring state determined the business had a $100,000 sales tax liability dating back seven years. The client knew it had customers in the neighboring state but was unaware that its activity there made it responsible for collecting sales taxes, the CPA said.