7 holiday sales tax sins
And ways to overcome them.
Despite the notoriously complex nature of sales tax, it’s easy to be lured into a false sense of compliance. Many businesses relegate sales tax to the back office or the bottom of the to-do list, especially during the busy holiday season. The fact is, it’s a hassle to correctly calculate, collect, remit, and file taxes, and dealing with exemption certificates and product taxability changes is often onerous.
But out-of-mind doesn’t mean all is well; it’s more likely to mean out-of-compliance. In fact, some common sales tax sins have potentially devastating consequences. At the height of the holiday season, when there’s a high volume of sales and a need for speedy fulfillment, staying compliant can be challenging at best.
1. Sin: Ignore consumer use tax
Consumer use tax is one of the most common causes of miscalculated and unpaid tax. The silent sibling to sales tax, consumer use tax applies to the consumption, use, or storage of tangible personal property (TPP) when sales tax wasn’t collected at checkout, as often happens with catalog or internet sales. It may also be due on items purchased while traveling in another state or country. And businesses owe use tax when they pull items purchased for resale and use them in-house.
Taxpayers are supposed to remit consumer use tax directly to the tax authorities, but less than 2 percent do. Consequently, states are working to increase consumer use tax compliance. Some are now asking non-collecting remote vendors to identify their customers, so tax departments can ensure these sellers are remitting the use tax they owe.
- Learn the difference between sales tax and consumer use tax
- Review all non-resale purchase invoices and accrue consumer use tax where appropriate
- Properly track and account for withdrawals from resale inventory
2. Sin: Mismanage exemption and resale certificates
Sales tax exemption certificates and resale certificates enable certain consumers to purchase taxable goods and services tax free. Consumers qualifying for an exemption must provide the seller with a valid resale or exemption certificate to prove they’re entitled to it. Without such a certificate, sellers can be held liable for the uncollected tax.
Invalid or lapsed certificates put the seller at risk of non-compliance. It’s therefore critical for companies to have an efficient certificate-management system in place, such as automation.
- Create an audit trail for certificates
- Update product and service exemption rules for every jurisdiction in which you do business
- Be able to quickly generate an exemption certificate summary report
3. Sin: Apply the wrong rates or boundaries
Failure to track rate, rule, and boundary changes can lead to trouble down the line. There are more than 12,000 sales and use tax jurisdictions in the United States, and according to Avalara tax research, there were 36,254 tax changes in 2017 alone. On top of that, states routinely amend taxability rules for goods and services. Finding accurate information on these changes can be like finding a needle in a haystack.
- Register in states where you have an obligation to collect tax (nexus)
- Use an automated solution such as Avalara AvaTax to track rate, rule, and boundary changes
4. Sin: Get taxability wrong
Sales tax rates are only part of the equation; states (and some localities) have their own taxability rules for goods and services, and these are subject to change at any time. For example, sweetened beverages are subject to a special tax in Berkeley, Philadelphia, and Vermont; repair, maintenance, and installation services are generally subject to sales tax in North Carolina, but generally exempt in California.
Failure to correctly apply the right rules can be costly. And, as always, the onus to account for these changes is on the business.
- Review all updates to state product and services taxability matrices (generally available on state Department of Revenue sites) for all states in which you do business
- Subscribe to individual state “tax change notice” email lists
5. Sin: File the wrong forms and pay taxes late
Filing and remitting sales tax correctly and on time can be challenging, especially for growing companies doing business in multiple jurisdictions. It can be hard to find the correct form to use in each state, and easy to miss filing deadlines. However, late or incorrect tax forms is a red flag to state auditors.
- Assess whether your filing schedule has changed in applicable states
- Review state e-filing and pre-payment requirements
6. Sin: Overlook changing nexus laws
Ignoring nexus is risky. While most businesspeople have some concept of nexus — the connection between a business and a taxing jurisdiction that triggers a sales tax collection and remittance obligation — many don’t realize that nexus laws are complex and subject to change. Numerous states have broadened their nexus laws in recent years. A few now hold that nexus can be established by economic activity alone (e.g., having 200 separate taxable sales transactions or more than $100,000 in taxable sales in a state).
- Review where you currently have nexus and identify applicable rule changes
- Make sure your business is registered where it needs to be
- Determine whether your business might have unwittingly created nexus
7. Sin: Passively accept negative audit findings
Don’t be afraid to challenge negative audit findings. State auditors routinely publish information regarding how to appeal a negative audit finding or contest a final decision. These typically include specific instructions on how to disagree with a final finding.
- Review your rights and responsibilities (on most state audit department websites)
- File a timely appeal
Sales tax compliance is tricky, especially for growing companies doing business in multiple jurisdictions, and for any company at holiday time. Handling it manually is complicated, time-consuming, and risky, which means it can inhibit rather than encourage growth.
Automating sales tax compliance with Avalara AvaTax gives companies the agility, flexibility, and efficiency needed to thrive, especially during the busyness of the holiday season and all year round.
Tax sins can be costly and can bring your successful business to a grinding halt. It’s always better not to sin in the first place. Join our webinar for retailers on September 4, 2018: How to ensure tax compliance doesn’t slow down sale seasons, including sales tax holidays.
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