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Top 5 Signs Your Client May Need Sales Tax Helpby
When it comes to multistate sales tax, most companies are oblivious to the issues that can quickly emerge and create a financial disaster for their businesses. As CPAs, clients assume you are looking after these issues and will notify them if there are special considerations to make. In reality, CPAs may not be looking at these issues unless specifically engaged to do so.
This article outlines five signs that your client may have a multistate sales tax obligation and that you, their CPA, may need to be more proactive about investigating. It’s still their call on managing this issue, but they may be looking to you to bring it to their attention.
1. The client has employees who travel to or work in other states. One of the most common ways that companies become subject to sales tax vulnerabilities in another state is by sending employees to work in that state or to travel to that state to solicit sales or the products or services they sell.
If you are doing payroll for your clients and notice they are registered in multiple states for payroll tax, consider if they should register for sales tax, as well. Being registered for one type of tax in a state, and not other types of taxes, is the quickest way to get attention from the state. Your client may not be doing anything that is taxable in that state, but by having employees work in or travel to that state, you should investigate what sales tax issues may exist before the state contacts your client.
2. Customers have made complaints. Customer complaints about being charged (or not charged) sales tax are often the first clue that something is wrong. Sure, some customers just like to complain about tax, but in many situations, their complaints are well-founded.
Your client may be charging tax on nontaxable products or services, using the wrong tax rate, or not accepting valid exemption certificates. If you hear that customers are complaining about your client’s sales tax procedures, there may be something to consider there.
3.Drop shipments are used to fulfill orders in other states. The use of third-party drop shipments to fulfill orders is becoming more common than ever before. In this situation, property is shipped directly to the final customer from the manufacturer or distributor (which may be your client). The states where the distributor (your client) has nexus will dictate which resale exemption certificate your client may need to collect from customers for which they are drop-shipping.
Failure to have proper documentation to support these tax-exempt transactions can create huge problems for the distributor if it is ever audited.
4.Your client uses Amazon warehouses. Amazon.com is a wonderful company and has provided countless opportunities for small business to utilize its global network for product fulfillment. Along with that opportunity, though, can come some sizable sales tax obligations. The Fulfillment by Amazon (FBA) program will allow retailers to place inventory at Amazon warehouses so that when orders are accepted from the webpage, they are sent to Amazon for packing and shipment.
The critical element for companies that use FBA is that Amazon has warehouses in 28 states. Inventory owned by the retailer can be in warehouses in any of these states (or multiple states). The presence of inventory in an Amazon warehouse creates nexus – and likely creates a sales tax collection and remittance obligation.
If you have clients that use FBA, be sure they know the sales tax requirements in these states. Amazon makes it very clear that they don’t provide sales tax advice and that each retailer must evaluate its own situation.
5.Your client files income tax returns in other states. As with filing payroll tax returns in other states, the filing of income tax returns in states outside their home state can also be a clue that sales tax filings may also be due. Because the nexus standard for income tax is higher than the nexus threshold for sales tax, companies that have nexus for income tax filing will always have nexus for sales tax filings.
That does not necessarily mean that your client has any tax collection obligation or liability, but periodically evaluating what your client does in that state can help you determine whether some sales tax compliance processes should be implemented.
The items listed above have been gathered from my years of working with multistate companies and their CPAs. Each company is different, and each CPA relationship is unique. However, most CPAs have easy access to one or more of the five items listed above and should periodically evaluate the necessity of your client to be filing sales tax returns in additional states based on the activities your client has in these states.
What I have also found to be true is that if your client is contacted by a foreign state for a sales tax audit, you, their CPA, will be the first one to blame for not bringing it to their attention that they should have been filing sales tax returns in that state.
For more insight on this and other sales tax issues, visit Taxify’s blog.
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...