top 10 sales & use tax tips 2013
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These 10 sales and use tax tips were developed by Avalara tax experts to help your business develop a proactive sales tax strategy to reduce your audit risk and get you ready for the new world of sales tax compliance.Collecting the right sales tax from the right customer at the right time and then figuring out how and where to remit it, is the compliance challenge of 2013, carrying with it tremendous risk for audits and penalties.TRANSCRIPT
SALES� USE�TAX
2013
Debates over online sales tax and related statutory rules and rate changes have vaulted sales and use tax compliance to the top of every savvy business-person’s 2013 action list. Understanding how to implement safeguards and sys-tems, monitor widely varying statutory rules, and find efficient ways to collect and remit the right sales and use tax to the right jurisdiction at the right time, can baffle even the most compliance-minded businessperson.
Developed by Avalara tax experts, the following top ten sales and use tax tips will help your business develop an effective proactive sales tax strategy long before the auditor knocks on your door. These tips are a starting point to ad-dress sales and use tax compliance in 2013.
BY
TOP 10 SALES & USE TAX TIPS. ©Avalara 2013. 2
Plenty of businesses incorrectly assume they have sales and use tax handled because their sales tax process has worked for them in the past—and as a result have incurred penalties and fines. However, as a business grows its sales tax obligations become more difficult to manage effectively. Some activities that increase the difficulty of complying with changing sales tax rules include:
• Selling into new states
• Selling over the Web
• Selling new products or services
• Deploying new ERP or POS software
• Failing to adapt compliance activities to chang-ing rules and regulations
As Congress reconsiders federal legislation to require remote sellers (including online retailers) to collect sales tax, companies might find themselves on the wrong side of an audit notice. Keeping pace with the vast array of tax requirements requires determination, intelligence, and the right tools.
The chart on the right illustrates the process many compa-nies go through before addressing the challenges of sales tax compliance. The truth is many don’t bother addressing it until the auditor appears or the tax notice is received.
By underestimating the complexity of sales tax, many companies unwittingly increase their risk of audit. As businesses begin operating in several states, or provid-ing taxable services, or discover through a tax notice that they’ve unknowingly overlooked a tax obligation, they quickly learn that managing sales and use tax compliance is far more complicated than it first appears.
1. Assess whether your current systems are properly addressing sales tax complexities. Have you had any negative audit findings, or paid any related fines or fees?
2. Follow best practices used by other similarly sized companies. Do they have a system for addressing sales and use tax compliance that you could replicate?
Sample of states enacting related rule changes in 2012 & 2013:
Texas, Colorado, Florida, New York, New Jersey
Read more about it:
} Even for legislators, sales tax is confusing
} 5 sales tax practices to stop doing in 2013
“Nobody at ANC is a tax expert. Mostly, we have sales people, we have project managers, and we have a small three-person accounting department. So we just couldn’t handle the tax issues. Instead of being audited yearly and owing lots and lots of money we decided to leave it to the professionals.”
—Barbara Barry, Senior Project Coordinator at ANC Sports
AUTOMATION
ON PREMISE SOLUTION
RELY ON CPA/TRUSTED ADVISOR
ONLINE RATE LOOK-UP
MANUAL RATE ENTRY
UNDERESTIMATE COMPLEXITY
Stages to sales tax automation:
TIP #1 Don’t underestimate sales tax complexity
TO DO:
TOP 10 SALES & USE TAX TIPS. ©Avalara 2013. 3
TO DO:While most business people have some concept of nexus—the connection between a business and a taxing jurisdic-tion requiring sales tax collection and remittance —many are unaware of dramatic changes to nexus laws happening now. For example, were you aware that many states have passed laws requiring remote sellers to collect sales tax if they get a certain amount of referrals from in-state af-filiates? And that Congress recently introduced the Mar-ketplace Fairness Act of 2013, based on 2012 legislation of the same name? If passed, this law would authorize states to require almost all remote sellers to collect sales tax as long as the states meet certain simplification require-ments. This will please states that have worked at light-ning speed over the past year to implement remote seller sales tax rules, and this is only the tip of the iceberg.
These issues signify a year of intense sales and use tax statutory changes, particularly regarding nexus.
“Once we realized we were going to be doing a direct product instead of a pri-marily resale product, we realized that we would be selling across the country as well as into foreign countries so we knew that we would have to have some kind of solution to manage the complexities of sales tax.”
—Connie Seguin, Controller at Twisted Pair Solutions
TIP #2 Determine tax liability by
understanding changing nexus rules
1. Review where you currently have nexus and identify applicable rule changes.
2. Make sure your business is registered in states where it’s required.
3. Determine whether your business might have unknowingly created nexus by engaging contract labor, attending out of region trade shows or other nexus-creating activities.
4. Watch the Avalara Nexus 101 Webinar.
Sample of states enacting related rule changes in 2012 & 2013:
Arizona, California, Pennsylvania, Massachusetts, New Jersey, Michigan, Florida
Read more about it:
} Pennsylvania reminds ecommerce businesses to register
} Arizonans to pay sales tax to Amazon in February 2013
TOP 10 SALES & USE TAX TIPS. ©Avalara 2013. 4
TO DO:Once you understand where your company might have created nexus (see tip #2), you’ll want to update sales tax rates for any new products and services to reflect any related jurisdictional changes.
Many states are addressing budget gaps by increasing product and service taxability. The Federation of Tax Ad-ministrators surveys states and the approaches they use to tax 185 services. The services are grouped into eight main categories (although each state uses slightly different definitions of what belongs in which category):
• Utilities
• Personal services
• Business services
• Computer services
• Admissions/amusements
• Professional services
• Fabrication repair and installation
Whereas states like Delaware, Hawaii and Washington tax a large number of services, other states such as Alaska, Virginia, and New Hampshire tax very few.
1. For each state within which you do business, review any updates to the taxability matrix (generally available on state Department of Revenue sites). Alternatively, subscribe to individual state “tax change notice” email lists.
2. Review the Federal Tax Administrators table of states cross-referenced by commonly taxed services (keeping in mind these change often).
Sample of states enacting related rule changes in 2012 & 2013:
Wyoming, New York, Missouri, Ohio, Illinois, Wisconsin, Texas.
Read more about it:
} Ohio: Progress through tax reform
} Texas taxable services updated
“I was managing all the sales tax rates within Dynamics GP and it was a lot of work. It was also very difficult to get the reports that we needed to file the sales tax returns. That’s when we decided we should automate and look for a sales tax solution."
—Danielle Jaworski, Controller at Breitling USA
TIP #3 Know which of your products
and services are taxable, and where
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TO DO:Consumer use tax is one of the most common areas in which miscalculated and unpaid tax is found in audits. Use tax is defined as a tax on the use of tangible per-sonal property (TPP) not otherwise subject to sales tax. Generally speaking, a purchaser owes use tax on taxable items purchased on which they paid no sales tax or less tax than the applicable sales tax rate. Unlike sales tax, the remittance responsibility lies with the buyer.
In some cases, the purchaser would be a business, such as a manufacturer or a distributer, buying goods outside the state or online. Use tax must also be paid when a business withdraws goods from inventory for its own use, if sales tax was not paid on those items at the time of purchase. It is the responsibility of a business to self-assess when, and if, use tax is accrued and to pay the state and/or local tax authority on a tax return.
Whereas states like Delaware, Hawaii and Washington tax a large number of services, other states such as Alaska, Virginia, and New Hampshire tax very few.
1. Learn the difference between sales and use tax.
2. Develop a written use tax policy.
3. Review all non-resale purchase invoices and accrue consumer use tax as appropriate.
4. Properly track and account for withdrawals from resale inventory.
Sample of states enacting related rule changes in 2012 & 2013:
Colorado, Wyoming, New York, Iowa, Texas, Virginia, Ohio, Vermont, Maine, California, Florida
Read more about it:
} Iowa, use tax, and streamlined sales tax
} California businesses and use tax obligations
TIP #4 Don’t ignore consumer use tax
“We knew when we went online that we were going to have some kind of au-tomation. We’re a multimillion-dollar company that has a lot of transactions and we need to find electronic solutions to manage the data. Having people do it is too expensive."
—Debi Gale, Accounting Manager at Cinder Block
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TO DO:Tracking and filing exemption certificates, the bugaboo of many well-intentioned business owners, has just got-ten more complicated. In 2013, several governors have already proposed plans that would change what their states exempt from sales tax.
Businesses that manage large numbers of exemp-tion certificates often confront a difficult challenge when audited to link specific certificates with specific transactions. In other words, to prove tax was not due on a particular sale. Certificates also expire or may be invalid, potentially leaving the selling business liable for paying uncollected tax.
1. Create an audit trail for certificates.
2. Update product and service exemption rules in each jurisdiction in which you do business.
3. Be able to quickly generate an exemption certificate summary report.
Sample of states enacting related rule changes in 2012 & 2013:
Colorado, Minnesota, Maine, California, Louisiana
Read more about it:
} Minnesota tax court: out of state purchases subject to use tax
} Colorado FYIs and sales tax-exempt transactions
“It’s not just the sales tax that you should have collected on the exempt sale, but the effect of the missing exemption certificates on the error rate of the sales tax audit sample, which the auditor will apply to the entire universe of tax-exempt sales in the audit period.”
—Jim Palmer, Tax Manager, Northern Tool
TIP #5 Understand changing
exemption certificate rules
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TO DO:Even companies working hard to accurately track and update changes in sales and use tax rules, boundar-ies, and rate changes often fail to remit their sales tax correctly. Knowing which form to use, where to file, and what to include in your returns can be an onerous task. Growing companies often struggle to track which tax forms to use in which state, not to mention the varying deadlines and format requirements. Handling this as-pect of sales tax compliance particularly given liability issues that might result from doing it incorrectly, creates havoc for many companies.
“The law changes and the tax changes depending on the point of delivery. So to have someone actually look at every sheet to validate the address changes, the tax code, the updated tax changes … we’d need a staff of 20 to do what Avalara does for us.”
—Julian Henderson, IT Manager at NW Shipping Room Supply
TIP #6 Know when, where, and how
to remit sales and use tax returns
1. Review whether your filing schedule has changed in applicable states.
2. Find out whether the states where you have to remit sales tax have implemented new e-filing or pre-payment requirements.
Sample of states enacting related rule changes in 2012 & 2013:
Colorado, Florida, Indiana, Maine, Virginia, Washington, Maryland, New York
Read more about it:
} Maryland issues new sales tax return form
} New York online sales tax system
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TO DO:Nexus — Avoid practices that put you at risk for audit: having out-of-date rates and rules, failing to recognize new rules that create remote seller nexus, or using error-prone manual processes to manage unwieldy sales and use tax laws and rates.
Exemption/ reseller certificates — Avoid these exemption certificate-related practices that might in-crease your risk of an audit: inability to quickly generate a summary report, inaccurate, incomplete and missing certificates, or expired certificates.
Consumer use — Avoid practices that might increase your risk of audit: failing to accrue consumer use tax, using inventory purchased for resale for your company’s own use without remitting sales and use tax to the state, or purchasing non-salable items from out of state vendors.
Filing and remittance — Avoid these filing errors that might increase your risk of an audit: failure to prepay where required, late payment, or payment to incorrect jurisdictions.
Product and service taxability — Neglecting to up-date product and service taxability as rules change, lack of updates to expanding product and service offerings.
"Our biggest audit hit was the exemption certificates and the no-tax sales. So we decided to go with AvaTax Certs. We really feel strongly that it is going to be a good tool for us to help with audits, to reduce our liability with states, and to reduce the frequency of state and multiple jurisdiction audits.”
—Heather Gravelle, Sales Tax Manager at Furniture Row
TIP #7 Address compliance red flags
relating to tips 1-6
1. Watch “Confessions of a Former Auditor,” a 2013 Avalara webinar.
2. Read the Aberdeen Group’s white paper, “Effective Sales & Use Tax Management.”
Sample of states enacting related rule changes in 2012 & 2013:
New York, California
Read more about it:
} New York Tax Audit: Company President Personally Liable
} California to Hire 100 Auditors for Online Sales Tax
TOP 10 SALES & USE TAX TIPS. ©Avalara 2013. 9
TO DO: There are at least 17 states with sales tax holidays in 2013. Sales tax holidays give consumers an opportunity to purchase goods and services tax-free. Ranging from school supplies in New Mexico to hurricane preparedness supplies in Louisiana, states specify the types of products that are exempt on which days, and for which customers.
By their very nature, these tax holidays can be ad hoc and unpredictable. Varying by type of goods, or time of year, over different periods of time. And there is abso-lutely no consistency from state to state. It's so haphaz-ard, there's little chance of getting this right consistently, which means potentially disappointing customers expecting to get a sales tax break on a purchase.
“Unless you’re just dealing with one location, one rate, it’s a good idea to have some kind of help. In my situation, with our business and with how many jurisdictions we’re dealing with, it’s an absolute necessity to be in compliance unless you have one employee dedicated to doing nothing but that.”
— Kristen Dodd, Senior Accounting Specialist at Component Distributors, Inc.
TIP #8 Know applicable sales tax holidays
1. If you operate a business in one or more of the following states, sales tax holidays are already in place: Arkansas, Connecticut, Georgia, Iowa, Louisiana, Maryland, Mississippi, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia.
2. Know which products and services are considered exempt and up to what value amount specified within the tax holiday rules.
Sample of states enacting related rule changes in 2012 & 2013:
Connecticut, Texas, Maryland, Massachusetts, South Carolina, Virginia, Vermont, Oklahoma
Read more about it:
} Connecticut Sales Tax Holiday
} Maryland Sales Tax Holiday for Energy Star Products
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TO DO:
1. Identify which manual processes have the lowest return on investments of time and money.
2. Consider moving certain operations to the cloud, could lower costs as well as risk exposure.
Read more about it:
} Offsite and automated: the future of online sales tax
} The truth about sales tax calculators
In 2013, automation is the name of the game. From inven-tory management to sales to finance, automation gives companies the agility, flexibility, and efficiency they require in a still-recovering market. The alternative – handling these processes manually – can stymie rather than pro-mote growth. Automation allows growing businesses to leverage limited resources of time and money without sacrificing productivity.
When handled manually, sales and use tax compliance is prone to error, and directs staff time to pass-through, rather than revenue-generating activities.
"On a typical day, we’re processing 300 sales transactions. We could never have the manpower to go through and manually calculate all the tax, nor would we want to."
— Kelly O’Hanlon, VP of Finance and Administration at Chempoint.com
TIP #9 Automate
TOP 10 SALES & USE TAX TIPS. ©Avalara 2013. 11
Companies trying to accurately collect, file, and report sales and use taxes face an uphill battle in 2013. For most companies, automating and outsourcing their payroll management process to experts is a matter of course. The same logic applies to the much more compli-cated area of sales tax management. Some additional resources will help:
1. Sales tax holidays
2. Avalara Nexus 101 Webinar
3. Table of Department of Revenue websites
4. Determine whether your company needs a Voluntary Disclosure Agreement
Or follow the example of thousands of other businesses and contact Avalara for expert advice and affordable transactional tax solutions.
About AvalaraFounded in 2004, Avalara pioneered a service-based platform for sales tax and compliance automation and has been recognized for years as one of America’s fastest growing technology firms. The company’s cloud solutions help thousands of customers stay focused on their core businesses by providing automated end to end compliance services including sales and use tax calculation, exemption certificate management, filing and remittance, and a broad array of related services.www.avalara.com
Read more about it:
} Offsite and automated: the future of online sales tax
} The truth about sales tax calculators
"Sales tax is a nightmare. We tried doing it ourselves internally and had a person working half time – 20 hours a week – filling out tax returns. It was a mess. A nightmare. And then, of course, the rates would change and all kinds of issues come up and it becomes a very costly process."
— Jeff Weimer, CPA Brokk at Inc
TIP #10 Get help
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