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 businessperson’s action list. Understanding how to implement safeguards and systems, 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 flummox even the most compliance-minded businessperson.
The following sales tax compliance checklist has five tips to identify steps your business can take to address your particular challenges. Developed by Avalara sales tax experts, these are a starting point, rather than an exhaustive strategy, for addressing sales and use tax compliance.
Tip #1 — Determine tax liability by analyzing changes to nexus rules
While most businesses have some concept of nexus—the connection between a business and a taxing jurisdiction requiring sales tax collection and remittance —many are unaware of dramatic changes to nexus proposals happening now. There are numerous developments on the federal level, but this tip focuses on current state proposals that that are currently underway. These rule changes significantly impact out-of-state remote sellers (such as online retailers), but all businesses should watch nexus laws closely.
- Review where you currently have nexus and identify applicable rule changes
- Make sure your business is registered in states where it’s required
- Determine whether your business might have unknowingly created nexus in a jurisdiction: using traveling sales people that physically enter a state to conduct business, utilizing contract labor, owning or leasing real or personal property in a state, participating in trade shows, or other nexus-creating activities
- Avoid practices that put you at risk for audit: having out-of-date rates and rules, failing to recognize new rules that create remote seller nexus, or using error prone manual processes to manage unwieldy sales and use tax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
- Watch the Avalara Nexus 101 Webinar
Tip #2 —Stop ignoring consumer use tax
Use tax is defined as a tax on the use of tangible personal 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 (either a business or an individual). In some cases, the purchaser would be a business, such as a manufacturer or a distributor, buying goods outside the state or online, to use, or consume as TPP. 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.
- Develop a written use tax policy
- 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.
Tip #3 — Understand changing exemption certificate rules
Tracking and filing exemption certificates, the bugaboo of many a well-intentioned business owner, has just gotten more complicated. Several governors have recently proposed plans that would change what their states exempt from sales tax.
- Create an audit trail for certificates
- Be sure to update product and service exemption rules in each jurisdiction in which you do business
- Be able to quickly generate an exemption certificate summary report
- Avoid these exemption certificate-related practices that might increase your risk of an audit: inability to quickly generate a summary report, inaccurate, incomplete and missing certificates, or expired certificates
Tip #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. Knowing which form to use, where to file, and what to include in your returns, can be an onerous task.
- Review whether your filing schedule has changed, keeping in mind the schedule generally relates to your business revenue
- Find out whether the states where you have to remit sales tax have implemented new e-filing laws
- Avoid these filing errors that might increase your risk of an audit: failure to prepay where required, late payment, or payment to incorrect jurisdictions
Tip #5 —Get help
Companies trying to accurately collect, file, and report sales and use taxes face an uphill battle. Some additional resources that will help:
- Sales tax holidays
- Avalara Nexus 101 Webinar
- Table of Department of Revenue websites
- Get more sales tax compliance tips
- Determine whether your company needs a Voluntary Disclosure Agreement
Or follow the example of thousands of other businesses and utilize the expertise and affordable solutions Avalara provides.