How to Handle Compliance in a Sales Tax Nicheby
Recently, Avalara’s VP of Marketing Julie Lubetkin interviewed Judy Vorndran, JD, CPA, partner at TaxOps, LLC about how she handles sales tax compliance, non-compliance and other complex sales tax topics.
Before joining the firm, Judy was the first National Tax Resource at a Top 100 CPA Firm where she launched the firm’s state and local tax (SALT) practice, and also spent 14 years exclusively focusing on state and local tax at PwC and Deloitte.
Here is what she had to say about her practice and the sales tax niche in particular:
Lubetkin: Tell me a little about your practice? What is TaxOps all about?
JV: At TaxOps, we leverage our comprehensive tax knowledge and experience to help clients navigate the chaos of tax policy at all levels, creating tailored solutions that reduce current tax liabilities and uncover long-term tax savings. In addition to tax outsourcing through TaxOps, we offer tailored state and local tax and minimization solutions and strategies. Tax is all we do. We’re focused on turning our clients’ top business priorities into clear, effective and forward-looking tax plans. Our tailored solutions take into account the operational disciplines.
Lubetkin: No company wants to be in arrears, but why is non-compliance for sales tax such a big deal?
JV: States yield broad powers in pursuing back taxes, penalties and fees for non-compliance. From simple mistakes to blatant fraud, and everything in between, the laws of each state where a company operates govern collection activity. Procedures are generally the same from one state to the next and include levying bank accounts, seizing tax refunds, garnishing wages, placing a lien on assets and pursuing criminal cases.
Lubetkin: Of course, there are costs to a company for non-compliance. What are some of those?
JV: At the federal and state level, various types of penalties could apply for non-compliance, such as a failure-to-file penalty for late filing, a failure-to-pay penalty for paying late, freezing your bank accounts, putting a lien on your house, garnishing future wages (i.e., Social Security benefits) and dipping into future tax refunds you may be entitled to. Moreover, operating on the “wait and see” method can cost your company dearly in the long run; here are some of the ways:
• CPA fees to prepare returns for all the years you’ve ever done business at one time; paying $10,000 for 10 years of returns for one state hurts a little more than paying $1,000 per year for that same state.
• Unpaid tax payments, plus penalties and interest.
• Lack of continuity, lost information, employee turnover and system changes all make data extraction and understanding your history very cumbersome, if not impossible.
• Loss of time. Pulling three to eight years of historic data is not the best and highest use of your time. This can be a full-time job – don’t you already have one?
• Nexus study review and fees to have historic data analyzed.
• Pay hourly attorney or CPA fees during due diligence to try to negate the conservative escrow amount the buyer has estimated.
• Significantly reduced purchase price or increased escrow to cover your unpaid taxes.
• CPA fees to prepare a Voluntary Disclosure Agreement (VDA) to release the amount of money escrowed – a legally binding contract that costs a lot of money. Oh, look, you still have to pay to have returns filed and pay taxes and interest.
There is often no time limit for collecting unpaid taxes and charging penalties for not filing. The government has up to six years from the date that any non-filed tax return was due to criminally charge you with failing to file a return.
Lubetkin: What do you see as the main reasons why companies don’t file their federal and state sales tax returns?
JV: A Huffington Post article from 2013 articulated a few of the reasons for non-compliance at the federal level: filing taxes is complicated, fewer people think taxes are fair, tax filing is time-consuming and expensive, and taxes are inherently unpatriotic. At the state level, those same reasons likely apply, and then add to it states where one is not domiciled and the reasons grow to, “What is the chance of them catching me?”
Lubetkin: What can an accountant do to help clients stay compliant?
JV: Companies can avoid these costs by knowing their obligations and preparing to meet them upfront. There are a number of ways companies can better manage their out-of-state tax obligations.
They must know their operations, where and what they sell, where they have property, and where employees are working or traveling to, as well as have systems and processes in place to track all of those. It’s critical to track where people and property are located, and the location where revenue streams are being earned. If you can send an invoice, you can apply sales tax. If you have payroll, you can add a sales tax license and file an income tax return.
They must also know their tax obligations before business is undertaken. Moreover, they must understand how revenue is generated. Often, companies like to hide behind Public Law 86-272, where your in-state solicitation presence could be protected, but that applies only for income tax purposes and the sale of tangible personal property. P.L. 86-272 does not protect the sale of services, sales taxes or franchise taxes.
And, of course, they must document, document, document. If you can support in writing when you started visiting a state, for how long, the frequency and what you were doing, you are going to be more likely to disprove nexus if a state or buyer comes knocking. At the end of the day, there will always be costs associated with filing tax returns. After all, someone needs to prepare them and you have to pay the tax.
Lubetkin: What is a VDA all about? How is it used?
JV: VDAs are a formal way to come forward to a state, either anonymously or on the record, and get forgiveness of past errors and reduce tax risk. It gives taxpayers a contract that allows them to move forward and disclose prior years’ liabilities based on a statutory look back period – typically three to six years. Penalties are almost always waived, as is the tax prior to the lookback period. Interest is not typically waived.
Lubetkin: How do you feel about the voluntary compliance system? Does it work? Does it need fixing?
JV: When I got started in public accounting more than 23 years ago, I remember that we had a “list” of people to talk to in certain states to discuss our clients’ failure to file and negotiate some type of agreement to come forward prospectively, or within a certain look back period.
Over time, that “list” has become a department within the state’s tax collection team – every state except New Mexico has a formal or informal VDA program. While many legislatures put amnesty programs out there to procure compliance, VDAs are a great way to manage taxpayers’ risk and mitigate prior tax and penalties and come forward in a forthcoming manner.
Lubetkin: What is the most important way companies can manage their out-of-state tax obligations?
JV: As long as companies understand their obligations before doing business in another state, taxes are rarely, if ever, prohibitive. However, not knowing the obligations and finding out down the line that years of back taxes are owed can cripple a business, making the out-of-state venture not only unprofitable, but also dangerous to the life of the business.
Lubetkin: For CPAs and accountants who do not currently offer sales tax services to clients, what are a few ways to start a SALT practice?
JV: Get the right leader! It is not an easy area in which to practice and requires a level of expertise and experience to bring the depth and breadth of knowledge necessary to lead and grow such a practice.
Lubetkin: What kind of education or training do you recommend to a CPA/accountant to begin offering this service to their clients?
JV: Start local with our state sponsored classes – this is a great place to get your feet wet in building knowledge around the issues of compliance required by each state. Typically, such sessions are free. I also recommend subscribing to all the SALT blogs and webinars offered by the Big 4 firms and regional firms. There’s lots of great free content there. Also, join the Institute for Professionals in Taxation, a specialty practice organization devoted exclusively to SALT people. They have fantastic seminars and conferences, given by long-time practitioners who can teach you the “ropes.”
Lubetkin: Why don’t you think CPAs and accountants offer sales tax services more readily to their clients?
JV: Because it’s a monthly task, time intensive and doesn’t garner the fees of other compliance work. It is a high volume, low price per return area to practice, and specialized technologies are required to enhance this type of practice, which adds more cost. Finally, to make the practice turnkey, the firm should facilitate payment processing; due to Sarbanes-Oxley and other independence rules, firms cannot deal with funding or payments on behalf of their clientele without running into the risk of becoming non-independent.
Julie is VP of Marketing, Channels and Partnerships at Avalara where she is responsible for driving channel marketing strategy and programs to help accelerate growth with industry partners, including solution providers, value added resellers, development and implementation specialists and accounting professionals.