The small business challenges of achieving accurate, timely excise tax returns
Every fuel distributor and petroleum marketer knows how difficult it can be to file accurate, timely excise tax returns. From state websites and web portals to manual entries and multiple spreadsheets, there's a lot to manage — and calculations can be complex.
Whether you’re new to the industry or have been filing returns for years, you’ve no doubt experienced just how tricky it can be to keep your audit risks low. Even one small oversight can lead to costly penalties and interest.
It all makes for a rather complicated situation.
On the one hand, you can’t afford to incur more risk. But you likely have other business priorities to attend to, and you and your team can’t spend all of your time managing excise tax returns and maintaining tax compliance.
Still, there are ways to stay ahead. The key is to identify and address some of the most common challenges faced by small businesses within the fuel industry.
What happens when you fail to file correctly?
As you look for ways to fine-tune your returns process, it's important to consider the risks that need to be addressed.
Each time a return is filed incorrectly, it raises a red flag and increases your chance of an audit. And if you file incorrectly multiple times, some states will nullify your license and force you to reapply.
What's more, there are even instances when not filing can trigger unintended consequences.
For example, let's say you handle a few jobs that require you to file excise tax returns in a neighboring state. Then months go by without any additional business in that state. If you don't have any activity during that time, there's a chance the state will cancel your license and force you to reapply when you decide to start delivering fuel there again. To prevent this from happening, you'll need to be proactive about identifying when and how to file a zero-dollar return.
As rules and rates continue to change, and as your business continues to expand, it’s imperative to stay ahead of these and other nuances. The first step is to understand the most common pitfalls so you know what not to do.
Common pitfalls to avoid when filing excise tax returns
Before you can put an efficient excise tax returns process in place, it's important to set a strong foundation. The best way to do that is to make sure you’re calculating correctly. This requires two critical components:
First, you need to have a system for staying ahead of rules and rates as they change. If your business is still relatively small, you may be able to do this by manually searching and scouring websites. Or you may need to leverage excise tax automation software as your business expands.
Whatever method you choose to use, the key is to watch for updates, including small ones, from one month to the next.
If you distribute fuel in multiple jurisdictions, you should also be diligent about tracking variations. Rules and rates can vary drastically from one jurisdiction to another, and it's up to you to ensure your transaction data takes the individual requirements of each one into account.
Of course, that’s all just for starters.
While accurate excise tax calculations are a crucial step to compliance, additional problems can arise when it's time for returns. At Avalara, our excise tax return specialists frequently hear about three issues in particular:
To keep your small business compliant, you need to file accurate returns according to schedule — no exceptions. A lack of understanding is never a sound reason for failing to report correctly and on time, even when the volume and complexity of reporting becomes overwhelming.
Some states require signature-ready forms, others ask for electronic returns. From electronic formats to Microsoft Excel files, you need to be prepared to provide returns in the exact format specified within each state. Because these can vary greatly from one jurisdiction to another, it’s important to have a system in place for easily producing returns in a wide range of formats. If your company handles this part of the process manually, it’s critical to be extremely precise.
Decentralized transaction data
Do you have a plan for what will happen if a reporting agency calls with a question? Will the answer be easy to find, or will you have to search multiple spreadsheets and identify gaps in your original data? Unless you've placed all of your transactional data into one central reporting solution, this can be a particularly challenging scenario that increases your risk of an audit.
Preparing for the challenges listed above is the first step to keeping your business compliant. If any of these pitfalls sound familiar, or if you want to be sure you avoid making these mistakes as your company grows, there’s good news. With the latest advancements in excise tax compliance software, it’s possible to automate the process of submitting timely, accurate returns and other required forms at an affordable price.
The 2021 sales tax changes report: midyear update
Your guide to navigating the complicated world of tax compliance and preparing for the future
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