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Sales and Use Tax Matters. Here's what you need to know to serve your clients.
What Your Clients Need to Know About Sales and Use Tax Compliance
Four ways to set businesses in the right direction
I’m sure you’re well aware of how complex the ever changing statutory rules and rate changes regarding sales and use tax can be, but your clients, especially small businesses, might be in the dark. It’s a confusing landscape — even to companies who dedicate resources to understanding the rules and safeguarding themselves from risk.
Knowing where to begin is the first step. If nothing else, advise them to do these four simple things.
Step #1 — Understand how changes to nexus affect your business
Your clients might know very well what nexus is — the connection between a business and a taxing jurisdiction that requires sales tax collection and remittance — but are they on top of all the changing rules related to nexus? While there are numerous developments on the federal level, advise them to look at the changes happening locally in their state. While nexus rules impact out-of-state remote sellers (such as online retailers), it affects other businesses, too—and in less obvious ways.
1. Review where you currently have nexus and identify applicable rule changes.
2. Make sure you’re registered in states where it’s required.
3. Determine whether your business might have unknowingly created nexus in a jurisdiction: Here’s a few examples – your sales force solicits business in other states, using contract labor, owning or leasing real or personal property in a state, participating in trade shows, and more. Be aware that if you have created tax exposure in the past you may limit the impact to your business by seeking help to engage in a Voluntary Disclosure process.
4. Avoid practices that put you at risk for audit: having out-of-date rates and rules, failing to recognize new rules that create remote seller nexus, or using error-prone manual processes to manage unwieldy sales and use tax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.
Step #2 — Don’t ignore consumer use tax
Many people are confused about what use tax actually means. In plain English, use tax is the tax levied when you purchase an item without paying your home state's sales tax and you use, give away, store, or consume that item in your home state.
Advise your clients that 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 distributor, who buys goods outside the state or online to use or consume as TPP.
Use tax must also be paid when a business withdraws goods from its untaxed inventory for its own use. Even something so harmless as a coffee supplier using its own inventory in the staff lunch room can have big tax implications. 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.
1. Develop a written use tax policy.
2. Just like in Step #1, 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 tax to a vendor or use tax to the state.
Step #3 — Understand changing exemption certificate rules and taxability
Tracking and filing exemption certificates, the bane of many well-intentioned business owners, gets more and more complicated every year as do rules about what items are taxable or not in a State. In 2013, governors from Colorado, Minnesota, Maine, California, and Louisiana have already proposed plans that would change what is exempt from sales tax.
1. Create an audit trail for certificates.
2. Update product and service taxability rules for each jurisdiction in which you do business.
3. Be able to quickly locate a certificate.
4. Avoid any exemption certificate-related practices that might increase your risk of an audit: unable to quickly generate a summary report; having inaccurate, incomplete or missing certificates—or using expired certificates.
Step #4 —Know when, where, and how to remit sales and use tax returns
Even companies that work hard to accurately track and update changes in sales and use tax rules, boundaries, and rate changes often fail to remit their liability correctly. And for state auditors, trying hard is not enough. Advise your clients on which forms to use, where to file, and what to include in their returns. Also let them know when filings are due to avoid penalties and interest for late filings.
1. Review whether your filing schedule has changed, keeping in mind the schedule generally relates to your business revenues.
2. Find out whether the states where you have to remit sales tax have implemented new e-filing laws.
3. Avoid the following filing errors that might increase your risk of an audit: failure to prepay where required, submitting late payments, or sending payment to incorrect jurisdictions.
There you have it. Think of these few steps as a springboard for a fully compliant business.
Mark Giddens is one of the founding employees of Avalara, the recognized leader in web-based sales tax solutions that’s transforming the sales and use tax compliance process for businesses of all sizes. He can be reached at email@example.com or you can join Avalara for a web seminar on Automating Sales Tax in QuickBooks (register)