Things to Consider Before Offering Sales Tax Services at Your Firm
The need for CPA firms to respond to changing client needs is greater now than ever before. CPAs and their firms can reap significant benefits from developing and offering new services their clients need. This may include employee benefit planning, international tax, fraud investigations, or staff recruiting. Many CPA firms have selected sales tax compliance and consulting as the extra service they want to offer their clients.
Their clients have asked and the firms have responded. It’s only sales tax, how hard could that be?
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Before launching into the virtues and pitfalls of CPA firms offering any type of sales tax service, let’s review some of the sales tax basics. Sales tax collections and remittances represent about 40 percent of state and local tax revenue; nearly $400 billion in 2015. Forty-five states have a state-level sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon don’t currently have sales tax), and there are more than 7,000 tax rates. Each state will have different substantive rules as to the nature of the product or service to tax.
In addition to sales tax (which is imposed on the purchaser when a sale occurs), each state will also impose “use” tax, which is the tax due on goods and services purchased without being charged sales tax. Use tax is only due if sales tax would have been due on the sale.
If you are not yet deterred, read on.
CPA firms wanting to offer sales tax services must first decide what that service will look like and how exactly they want to provide this service. Both are significant decisions that require careful analysis of:
- Your client base.
- Local competition.
- Your motives for wanting to add this service line.
Sales tax services, like income tax services, fall into two natural categories: compliance and consulting.
Compliance services include:
- Tax registrations.
- Calculating and collecting the tax due.
- Filing the returns required to remit the tax.
- Transmitting the tax collected.
- Handling notices.
- Account maintenance.
Consulting services include:
- Nexus determination.
- Product taxation.
- Sales tax audit defense.
- Due diligence.
- Tax refund studies.
- Voluntary disclosure.
- Risk assessments.
It is entirely possible to offer one without the other. Many CPA firms provide compliance services without consulting services, and many sales tax boutique firms provide great consulting services without any compliance.
CPA firms can deliver compliance and/or consulting services by building and training their own staff and “insourcing” this service line, or they can partner with local or regional specialty groups and “outsource” the service. Both can work very effectively depending on your size, client base, and expressed level of interest.
Besides the differences in the type of services provided, compliance and consulting services vary on the revenue streams produced. Most sales tax returns are prepared on a monthly or quarterly basis, which means that firm revenue can be fairly steady and predictable. Most compliance services are billed on a “per-return” basis and not rate-per-hour.
Consulting revenue, at least in the short term, is very inconsistent. Consulting services are generally needed when an actual or perceived problem arises. When that issue arises, it must be addressed and resolved. When that problem is resolved, the project ends, and then you begin pursuing other projects. Consulting revenue tends to be higher but fluctuates more unless you have an active and intentional marketing and sales effort in place to keep the pipeline full. Many firms have started sales tax compliance practices believing that sales tax consulting work would be generated. Rarely does this happen; do not be misled by this myth.
The staffing model is also different between consulting and compliance. Compliance requires a detailed thought process and the ability to manipulate data, look for irregularities, ask insightful questions, and manage the rigid filing deadlines. Most returns are due by the 20th of the month following the month the sale occurs. That means sales data and tax data must be obtained from customers early in the month so that errors and irregularities can be identified and resolved. When dealing with multiple companies filing in multiple states and local jurisdictions, the task can become overwhelming very quickly. Missed filing deadlines lead to penalties, extra costs, and mad clients.
Sales tax consulting requires a skill set completely different from compliance. Consulting is a skill that takes years to hone. It requires the ability to:
- Know what information is relevant to getting the right answer.
- Gather the data.
- Evaluate the data for accuracy.
- Research the law for the states involved.
- Write a clear and concise report.
- Communicate the findings to the client.
It also requires the ability to assess risks and strategies to resolve the problems identified.
Sales tax consulting is nothing like federal tax consulting. The rules are different and the state procedures are different. Firms wanting to offer sales tax consulting must be willing to invest significant resources in research tools, training, news feeds, and professional associations. Special certifications in sales tax also require time and investments. Don’t expect to develop any type of consulting practice without a long-term commitment to training and staff development.
One of the common recruiting areas for sales tax consultants is from state departments of revenue. This does not often work out because the skill set needed for a CPA consulting practice is much different than the skill set held by a state auditor who has been trained by the state. Rarely do sales tax compliance staff make good consultants. Likewise, rarely do sales tax consultants make good compliance staff. If you are considering sales tax offerings, do not attempt to cross-train staff for these services. Hire and train for one or the other.
Finally, before offering either consulting or compliance services, be sure everyone in your firm is committed to providing this for the long term. Taking on a company’s sales tax compliance needs requires a lot of time, energy, and money. Your clients have entrusted you with this process and they expect you to deliver for the long term. If you start a compliance practice in January but realize in June that it’s not fruitful and communicate that to your client, then you will likely lose that client completely.
In short, don’t start this type of work if you are not fully committed to it and have a dedicated staff to handle the work.
Consulting takes longer to ramp up than compliance. It may take months before any significant consulting work comes through the door. The national sales tax consulting market is also full of very experienced professionals who work on a nationwide basis. Many of these practitioners have 20 to 30 years of experience and have served as partners, directors, and managers at the Big Four. Clients that recognize their need for competent advice will search the web for the best resource, and there is no assurance that your client will even select your firm for consulting unless you can demonstrate that your firm can deliver a high-quality and accurate product.
For small CPA firms (under 75 staff), providing either compliance or consulting services may not make economic sense. There is generally no critical mass to sustain the personnel and technology costs associated with this work unless there is a huge client base ready to go. For small firms, the best solution is to find a great sales tax compliance provider and a great sales tax consulting provider, and develop relationships and referral networks with them. Clients don’t really care that you are not directly providing these services. They look to you as the quarterback of the team and expect you to know who provides the services they need.
For larger firms that can afford the investment and weather the short-term disruption, you may want to select either compliance or consulting as the service you build internally. If you build a compliance practice, then partner with a great consulting firm. If you build a consulting practice, then partner with a good compliance group. Further, unless you have a large multistate filing client base, offering these services for single-state filers does not make sense.
Sales tax compliance and consulting are unlike other types of tax compliance and consulting. It’s unlike payroll tax, and it’s unlike income tax. Sales tax is quickly becoming the top revenue source for states. There is no doubt that your clients may already have sales tax problems or may be headed toward a sales tax problem. Your clients need help and your firm may be the first call they make when they realize they need help. You will need to respond quickly and accurately to their needs. You may have only days or hours to respond to their questions, so you need to have resources ready to go when the call comes in. Telling your client that your sales tax expert is busy with corporate tax compliance and will call them after March 15 is not a very good reply.
In most cases, the best thing CPA firms can do is find local or regional resources that specialize in sales tax and develop a relationship with that firm. Giving bad sales tax consulting advice can be costly to your client and to your firm. Before you embark on offering any type of sales tax service, know your client base and your staff. Sales tax compliance and consulting should not be viewed as “time fillers” during slow times of the year. Sales tax compliance and consulting are separate practice lines that can provide significant firm revenue when developed, staffed, and marketed properly.
Ned Lenhart, CPA, is the owner of Interstate Tax Strategies PC in Snellville, Georgia. Ned’s 30 years of experience in sales and use tax consulting allows him to quickly help companies deal with the tax issues they face. He started Interstate Tax Strategies in 2003...