The long-simmering issue of varying regulations for state and online sales boils up in Wolters Kluwer Tax & Accounting’s recent sales and use tax compliance survey, with the majority of sales tax professionals citing interstate tax liabilities as their biggest business danger.
Sales and use taxes that differ greatly among states and among municipalities exacerbate multistate and online issues, particularly with more than 10,000 jurisdictions that levy sales and use taxes in the United States, according to the report, Improve Your Sales and Use Tax Compliance to Grow Your Business.
“Regulations are compounded significantly when organizations conduct business in multiple states or sell products over the Internet, making it difficult to determine jurisdiction,” the report states.
According to the survey, which was conducted by Aberdeen Group and includes responses from more than 260 tax professionals who specialize in sales and use tax, here are the five biggest sales and use tax risks to businesses:
- Interstate tax liabilities (71 percent)
- Inaccurate data (57 percent)
- Disruption from audits (37 percent)
- Audit penalties (17 percent)
- Class-action lawsuits (13 percent)
Naturally, these risks raise compliance questions that, in turn, increase the likelihood of an audit. Indeed, 97 percent of tax professionals said their organization has been audited in the past five years.
Of those organizations that were audited, 17 percent faced fines, with small companies fined an average of 1 percent of their revenues and mid- to large-sized companies nabbed for 2 percent of their revenues.
That, according to one Wolters Kluwer executive, is a lot of moolah to leave on the table.
“One to 2 percent of revenue represents significant cash value that might have been allocated to other strategic growth plans had there been no penalties,” Mike Sanders, vice president of product management at Wolters Kluwer Tax & Accounting, said in a prepared statement. “Tax and business leaders need to recognize that sales and use tax compliance is not just a tax issue. It’s a business issue – the effects of which can impact growth, profit, and/or investment capital if not well accounted for.”
What’s more, companies that were fined once typically face repeat audits, the report states. Of the respondents who indicated they were audited in the past five years, 34 percent said they’ve been audited more than five times.
So, what to do? The biggest concern for tax professionals is integrating their sales and use tax functions and their enterprise resource planning (ERP), the report states. Failure to do that can lead to errors, inaccurate data, and (yikes!) manual work. That burdens the tax and IT staffs.
The report deduces that the solution lies in technology. Software can streamline calculations, improve accuracy and efficiencies, and centralize tax information.
Still, the survey indicates that only 24 percent of respondents use the cloud, while 63 percent use on-site sales and use tax solutions. About a third (38 percent) said they’d prefer a cloud-based sales and use tax platform.
Of the respondents who had faced audit fines, 71 percent changed their business processes, while 43 percent assessed their current software.
As for tax professionals, 81 percent said software has or would improve their performance, while 35 percent said they won’t work for a company that doesn’t provide compliance software.
Terry Sheridan is an award-winning journalist who has covered real estate, mortgage finance, health care, insurance, personal finance, and accounting and taxation issues for newspapers, magazines, and websites. A Chicago native and former South Florida resident, she now lives in New England.