Spring is finally here, tax-filing season has crested, and accounting practices all over the country are about to slide into summer. Similarly, your business clients’ attention is now focused on other tax issues, and while sales tax compliance may not be the first thing on the list, I know it’s one of those areas that’s likely to keep your clients up at night.
Besides actually paying sales tax, calculating, collecting, and remitting sales tax is perhaps the most loathed activity required of your retailing clients. This lack of love for compliance often adversely affects the compliance’s effectiveness, to say the least. Put another way, many of your retailing clients, whether they want to admit it, probably already have a sales tax problem.
If your practice has experience solving deep sales tax problems, stop reading, get a marketing campaign started, and bill some hours! However, if your practice is savvy enough to spot a potential problem with a client’s sales tax house, but perhaps finds the many moving parts daunting, engaging a sales tax specialist might make sense.
Under any circumstances, it is helpful to understand the types of engagements a sales tax specialist might provide.
Sales tax issues come in many flavors, but they are typically triggered by similar events. Often, an audit or other contrary interaction with a sales tax authority gets the ball rolling. Other times, a business activities’ questionnaire arrives in a mailbox or maybe even a competitor is ensnared in sales tax controversy. The bottom line: Most of your retailing clients will eventually come to a moment we’ll delicately call “sales tax introspection.”
When the moment of sales tax introspection is followed by thinly veiled panic at the potential for adverse consequences, some sales tax expertise is probably in order.
Here is a beginner’s list of potential sales tax moving parts and how a sales tax specialist can help:
1. Where should a retailer collect? A nexus study is a logical first step for retailers. This study is typically delivered in a narrative format, broken out by jurisdictions.
A sales tax specialist can apply the various rules surrounding sales tax nexus to answer a critical threshold question: Where is a company obligated to comply with sales tax rules? Remember, sales tax nexus rules are unique to this transactional tax and are dissimilar from income tax, payroll tax, or gross receipts tax rules.
Also, keep in mind that a nexus study occasionally reveals a company does not have a sales tax obligation in states or places where it had concerns about compliance. Whether the news is good or bad, a sales tax nexus study sets the table for the compliance efforts to follow.
2. Is what a retailer sells subject to taxation? A study of the taxability of the objects (goods, services, or both) a client sells is another element critical to forming a sales tax compliance plan. This study is also typically delivered in a narrative format; it may simply distinguish the characteristics of the objects as they pertain to general sales tax principles, or a more granular study may break out treatment of those objects state by state.
In the sales tax realm, the nature of the objects a client sells is important, as well as other transaction details. For example:
- Who are the client’s customers (resellers or not-for-profits)?
- How are the client’s customers using the objects they purchased impacting collection obligations?
Like a nexus study, the news is not always bad, and a detailed research study of the objects your client sells may reveal less exposure than was originally contemplated.
3. What are the amounts at play and the likelihood of penalties and interest? A tax exposure analysis (TEA) reveals in real dollars the amount of taxes that should have been collected in a given jurisdiction for a given period of time. Once a client knows where it is required to comply with sales tax rules, and whether what it sells is taxable, the TEA provides a reliable basis to make decisions about whether, and how, to get into compliance.
A TEA is typically delivered in a chart format, with an executive summary refining the results into a concise report jurisdiction by jurisdiction. A proper TEA naturally requires financial data, but it also requires proper tax treatment for the items sold and specific time period reporting. A TEA may reveal a given state’s exposure is more or less than originally estimated; the value the TEA provides is empirical evidence to support a client’s estimated exposure.
4. What to do now? Don’t go it alone! A sales tax specialist can help recommend appropriate responses to the information gathered in the prior steps. Based on the conclusions reached, the correct response for a given jurisdiction may be to leave the status quo.
Sometimes, the best path is to register presently and simply begin complying. In other jurisdictions, perhaps the pursuit of a voluntary disclosure agreement for past periods, or even a simple historical registration project, is the best approach. Occasionally, states will even offer amnesty periods as an enticement for past compliance reconciliation.
A sales tax specialist’s contribution of sales tax knowledge and experience at setting strategy in the right situation can be a valuable investment for your practice and your clients.
Sales tax compliance is often the last area of tax compliance clients are concerned with, leaving you to remind them of its importance. So, add some value to the services you already provide by helping them with it, and maybe give a client or two a better night’s sleep.
About Shane Ratigan
Shane Ratigan is a Tax Advisory Services senior manager for Avalara. He conducts and reviews voluntary disclosure engagements, nexus analysis, tax research, and audit defense support. Shane is a subject-matter expert on sales tax compliance for internal and external stakeholders. Contact him at [email protected].