Vice President of US Tax Policy and Government Relations
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Many businesses relegate sales tax to the bottom of the to-do list, especially during the busy holiday season. However, out of mind won’t cut it in this case. After all, you don’t want your clients’ businesses to be non-compliant. This could lead to loss of customer loyalty, brand value and more.
Some common and avoidable sales tax mistakes have potentially devastating consequences. But at the height of the holiday season, when there is a higher volume of sales and a need for speedy fulfillment, staying compliant can be challenging.
Here are five sales tax tips you can review and pass on to your clients:
Apply the Correct Rates or Boundaries
Failure to track rate, rule and boundary changes can lead to trouble down the line. In 2017 alone, there were 36,254 tax changes. On top of that, states routinely amend taxability rules for goods and services. Finding accurate information on these changes can be like finding a needle in a haystack.
Manage Exemption and Resale Certificates
Sales tax exemption and resale certificates enable certain consumers to purchase goods and services tax-free. Those who qualify for an exemption must provide the seller with a valid resale or exemption certificate to prove they are entitled to it. Without such a certificate, sellers can be held liable for the uncollected tax. Invalid or lapsed certificates also put them at risk of non-compliance. It is critical for companies to have an efficient certificate management system in place, perhaps involving automation.
Get Taxability Right
Sales tax rates are only part of the equation; states and some localities have their own taxability rules for goods and services, and these can change at any time. For example, sweetened beverages are subject to a special tax in Berkeley, Philadelphia and Vermont; repair, maintenance and installation services are generally subject to sales tax in North Carolina but generally exempt in California. Failure to apply the right rules can be costly. As always, the onus to account for these changes is on the business.
Don’t Overlook Changing Nexus Laws
Ignoring nexus—the connection between a business and a taxing jurisdiction that triggers a sales tax collection and remittance obligation—is risky. While most businesspeople have some concept of it, many don’t realize the laws are complex and subject to change. Numerous states have broadened their nexus laws in recent years. A few now hold that it can be established by economic activity alone – for example, having 200 separate taxable sales transactions or more than $100,000 in taxable sales in a state. Review where your clients currently have nexus, and identify applicable rule changes. Make sure a client’s business is registered where it needs to be and determine whether the company might have unwittingly created nexus.
Don’t Ignore Consumer Use Tax
This is one of the most common sources of miscalculated and unpaid tax. The silent sibling to sales tax, consumer use tax applies to the consumption, use or storage of tangible personal property (TPP) when sales tax was not collected at checkout, as often happens with catalog or internet purchases. It may also be due on items bought while traveling in another state or country. In addition, businesses owe use tax when they pull items purchased for resale and utilize them in-house.
Taxpayers are supposed to remit consumer use tax directly to the proper authorities, but less than two percent do. Consequently, states are working to increase compliance. Some are now asking non-collecting remote vendors to identify their customers so tax departments can ensure these sellers are remitting what they owe.
Sales tax compliance is tricky, especially for growing companies doing business in multiple jurisdictions and for everyone at holiday time. Handling it manually is complicated, time-consuming and risky, which means it can inhibit rather than encourage growth.
Preparing for an influx in sales by getting educated can give companies the agility, flexibility and efficiency needed to thrive, especially during the busyness of the holiday season, but all year long. Ensure your role as a trusted advisor, and help your clients meet these challenges.