INTRODUCTION

Economic and political forces are converging to create a new sales tax compliance challenge, one that is hitting small and midsized (SMB) businesses especially hard. Accountants – as tax professionals and as trusted business advisors – have a perfect vantage point to monitor what's happening in the tax compliance arena.  From this vantage point, they can see what these changes mean, to them – and their clients.

What they see is as simple as it is painful:  SMBs are caught in a compliance crossfire. On one side – the lure of electronic commerce and the need to grow that is prompting SMBs to expand markets, a move which frequently creates compliance issues. On the other side – financially-burdened states are getting increasingly aggressive in tracking down tax compliance violators, seeking to recover otherwise lost revenue – revenue lost primarily to untaxable e-commerce.

In the background is a much more complicated compliance environment. Many of the more than 7,500 sales taxing jurisdictions across the U.S., as they seek to enhance revenue, are increasing the rate at which they make compliance-sensitive tax rate and regulation changes. Meanwhile, SMB businesses are becoming less willing – and in a competitive environment, less able – to bear the expense of allocating staff and other resources needed to ensure compliance in dozens, hundreds or even thousands of taxing jurisdictions. In addition, some states and larger businesses (those with nexus in virtually all states) are lobbying for federal legislation that would allow – or even require – states to mandate that out-of-state companies collect and remit taxes on their Internet and other electronic commerce sales.  This sweeping rule-change, if passed, would create a potentially massive challenge for all businesses, especially for SMBs – the most vulnerable and least resource-rich, and therefore the least capable of achieving compliance while maintaining profitability.

In an environment that's been looking increasingly grim to SMBs, one solution to those businesses' resource and compliance woes is seen by some industry experts to be emerging – just in the nick of time.  Sales Tax Management Services (STMS) – especially those STMS solutions that combine Internet search and calculation – offer SMBs real-time access to their sophisticated computer systems' enhanced capabilities to automate sales tax calculations, and cut the costs of all the core processes involved in sales tax compliance:  rate setting, collection, reporting and remittance. 

This advanced computer-based technology approach to compliance was once available – as high-ticket software systems, but not as on-demand web services – exclusively to (and affordable only to) Fortune 1000 companies.  However, the concept of an automated sales tax management system has – through on-demand web-based services – evolved and migrated to the SMB sector.  With the pressures being created by the states – and by the states' demands for more aggressive sales tax compliance – accountants serving the SMB marketplace are beginning to take notice.

SMBs are not the only ones challenged by increasingly aggressive sales tax compliance enforcement policies.  Businesses of all types and sizes are increasingly and seriously challenged to comply with state and local sales tax requirements.  As they move further into markets beyond their backyards, and as they grow onto the Internet, all businesses are realizing that there may be no end to how big this sales tax compliance challenge will grow.  With upwards of $20 billion dollars in uncollected sales tax revenue at stake, the states' desire to tighten up systems and capture significant portions of that revenue can be understood, if not appreciated, even by those firms that feel they're being squeezed.

Forty-five states – and the District of Columbia – impose sales and use taxes on purchases of tangible goods, while 4,696 cities, 1,602 counties, and 1,113 other jurisdictions also impose sales taxes. Complicating matters is an increase in how often taxing bodies change their rates and regulations on what is taxable. In 2005, there were 3,000 such changes alone nationwide, up from just about 1,000 a few years before. The total number of tax rate changes alone increased to about 950 in 2005 from about 500 in 1995.

To make better sense of this increasingly complex sales tax environment, businesses often call on accountants for advice.  Those with larger organizations are able to access in-house accounting departments or tax specialists, while smaller SMB businesses typically defer to public practice CPAs for help. Either way, practitioners from all walks of the profession made it clear that they concur – sale tax compliance is a large and growing concern for their clients or employers.

"Companies can be challenged to keep up with what's required when they are on the fast track, adding sales people in new markets or selling over the Internet," said Jack E. DeYoung, CPA, owner of a small accounting practice in Madison, Wisconsin. "Here in Wisconsin, we have state and county sales taxes – and then the five counties around Milwaukee have an additional assessment to cover the cost of the Milwaukee Brewers baseball stadium."

At a much larger northeast super-regional accounting practice, the J.H. Cohn CPA firm, tax partner Neil Becourtney, said, "With 7,500 taxing jurisdictions to deal with, this can be a major problem. A very small mail order company may have to track customers down to their ZIP codes to make sure they are compliant."

Becourtney is among many CPAs who can recall horror stories of clients located near state borders – clients who found that doing business across the state line has brought unexpected and damaging tax consequences.  One of Becourtney's clients, a $4-million-a-year telephone systems sales and service company in Northern New Jersey, sold to and serviced customers in neighboring New York City, believing they were not responsible for collecting sales taxes from their customers there. Compounding the problem, this client did not contact Becourtney about potential sales tax liability. When a New York State Revenue Department income tax audit on one its customers uncovered a receipt from the New Jersey telephone company client, that department launched a separate tax audit – an audit that found the client company was indeed responsible for collecting sales taxes. The Revenue Department's bottom-line determination: Becourtney's client owed $100,000 in un-remitted taxes and penalties, or roughly 2.5% of its annual revenues.

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