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Don’t Treat Sales Tax Like a Game of Hot Potatoby
Remember that simple game from childhood? You started with an object and passed it around until suddenly a timer went off. Whoever was stuck with the object (the hot potato) was out when the bell rang.
In many firms and in many client relationships, sales tax is that hot potato and the timer, in the form of a sales tax audit, is likely to go off at any minute. No one wants to take responsibility for this area of tax. And then something goes wrong.
In the event of a problem, everyone is going to be looking for someone to blame. Sales tax might involve small dollars per transaction, but mistakes can add up to big dollars in assessments, penalties, and poor customer service.
Often, neither party is even aware that there is a hot potato in the room. Both parties just assume the other person has full control of the fiery sales tax spud. And we all know what happens when we assume.
So What is an Accountant to Do?
1. Take charge of the situation. Continue to annually review your client’s year-end sales tax liability and check for subsequent payment. Compare it to the prior year’s balances for signs that the growth in the account balance has outpaced revenue growth.
2. Document your agreement with your clients about sales tax collection, returns, remittance, and filing. Documentation is key, even if the client is taking full responsibility. Is it covered in your engagement letter?
3. Ask questions regularly to identify any possible changes in client taxability, jurisdictions, or nexus. Find out if they have new sales and distribution models, have added any remote employees, or have added or expanded their delivery fleets. Business expansion resulting in new buildings, land, or distribution partners could be signs of additional sales tax, as well as income tax, exposure.
You don’t have to offer the services yourself, but you need to be aware of options for your client to manage this important area of tax. Your clients expect you to keep them informed of areas of potential risk, and that includes sales tax.
At a minimum, you should be knowledgeable about solutions like Taxify that offer an automated, integrated solution to sales tax calculation and filing with a client management dashboard and portal that offers a single view across client sales tax filings and remittance. You would also be wise to seek out state and local tax experts in your area for cross-referrals.
And About That Hot Potato: How Would it Be Taxed?
In many states, food items like potatoes are exempt from sales tax unless they are served as prepared food. That means cold potatoes would be exempt from sales tax, while that hot potato of yours, if served in a buffet, is probably going to be subject to sales tax. (Be sure to check the specific rules in your state.)
Geni Whitehouse, CPA.CITP, CSPM, is a speaker and writer and the countess of communication at Even a Nerd Can Be Heard. She is a former partner in an Atlanta CPA firm and a former software executive on a mission to eliminate boring from the worlds of accounting and...