What companies know about sales tax compliance
Wakefield Research uncovers the highs and lows from the tax pros.
One would think that managing sales and use tax would be old hat by now because companies have been managing it since the beginning of taxes, but more and more organizations are facing greater challenges when it comes to compliance — and for good reason. Online sales are skyrocketing while state revenues are in decline across the U.S. As lawmakers evolve their state’s tax rules to shore up deficits, the tax landscape is in constant flux, leaving many accounting and finance pros in the dark.
Leading research firm Wakefield Research set out to investigate why sales and use tax compliance is quickly becoming one of the more complicated parts of doing business. This report draws upon a 2017 survey, which investigated what leading and emerging companies in the U.S. know (and don’t know) about sales tax compliance — and, more importantly — what the accounting and finance professionals in the trenches are doing to keep up with the ever-changing tax rules as they maintain accurate accounting processes to safeguard their business from potential audits.
About the survey
The survey, conducted in May 2017, contains online responses from over 400 U.S. finance and accounting professionals across several industries, ranging from ecommerce and retail, software and technology, manufacturing and distribution, among others. The survey covered a wide range of topics from proposed federal legislation to nexus, sales and use tax audits to the cost of compliance, and more. Companies surveyed have annual revenues of $10 million or more.
Compliance risk on the rise: Ecommerce boom fuels more regulatory requirements
According to Forrester Research, ecommerce sales will reach approximately $500 billion by 2018, a 40% increase from 2014. Among the companies Wakefield surveyed, 97% sell online and most have significantly increased their online transactions in the past five years. The dramatic rise of online sales has not gone unnoticed by state and federal lawmakers. The U.S. Census Bureau indicates that sales and transactional taxes account for 47% of state revenue. Either through creative legislation (like broadening the definition of taxable services or mandating use tax reporting on all out-of-state transactions) or by asserting that tax is owed through audits, the states are intent to recover lost revenue. This creates more tax risk for companies of all sizes across all industries.
The survey found that there are many misconceptions around sales tax audits. One of the most striking is the belief among tax pros that a company is only at risk of being audited by states in which it files and remits. The truth is, states now routinely conduct audits on companies regardless of where it’s headquartered or whether it has declared nexus. That makes audits a high risk area for any business. According to the survey, the average audit costs a company more than $300,000 (up 163% from 2014).
Major audit mistakes found in the trenches:
- Missing documents, such as exemption certificates
- Applying the wrong sales tax rates or exempting tax on taxable transactions
- Producing the wrong documents requested by an auditor
Nexus or not? Knowing where to collect and remit sales and use tax is confusing
Nexus (the physical and/or remote presence within a state that defines a tax obligation) is the 800-pound gorilla of compliance. Even the most seasoned tax professionals struggle to get it right. The reason for this might be because the rules that determine nexus are ever-changing and vary from state to state. At one time, companies could use a decision by the U.S. Supreme Court in Quill Corporation v. North Dakota (1992) as a guideline. In that case, it was simple: States could not require companies to collect state sales tax unless those companies had significant physical presence, like a warehouse or storefront. But that has all changed.
In 2017, many states have added newer forms of nexus, such as “economic nexus” and “click-through nexus,” to the mix as a means for revenue recovery. That creates even more tax planning problems and audit risk for companies.
According to the study, 94% of survey respondents have misconceptions around what creates nexus. By itself, that’s not surprising or alarming but 98% of the same respondents are doing one or more of the types of activities that create nexus in many states.
Research also shows that 31% of companies don’t know or can’t confirm a routine process for assessing their nexus obligations, even though the majority of respondents (61%) are registered to collect sales tax in multiple states.
Bring in the calvary! More bodies needed for the same job
One of the biggest trends since the original study done by Wakefield Research in 2014 is the increase in staffing needed for tax compliance related activities. On average, companies surveyed have six people (up by four since 2014) dedicated to sales and use tax management.
While most CFOs and finance leaders would agree that any measure to offload tedious, non-value-add tasks is worthwhile, sales tax is still a predominantly manual task. And for many, it’s getting even more manual. According to the research, 62% of companies surveyed have hired additional staff to manage sales tax within the last five years.
The additional staff would indicate a shorter turnaround on compliance related tasks, but compared to 2014, the average time spent on indirect tax compliance increased by over 250%.
Companies aren’t getting less adept at compliance, and they’re clearly investing in the resources to manage their business, but the volume of tax rates and product/service taxability rules is outpacing many companies’ ability to keep up. In fact, 95% of respondents agree that understanding sales and use tax has gotten increasingly more difficult in recent years. Which tasks pose the greatest burden? Respondents indicated the following: complexity and concern over getting audited, lack of consistency/continuously changing rules, administration and time it takes to complete tasks, financial cost to the business, and amount of paperwork that must be completed.
Wrong tool for the right job: outdated compliance strategies are still the norm
Business-as-usual processes are not good enough. The data indicated two things: Many businesses don’t account for sales tax rules correctly (especially companies that sell online and have tax obligations in multiple states) and the tools used to manage compliance are either outdated or not designed for the job at hand.
There were close to 14,000 changes to U.S. rates and jurisdictions in 2017, yet 31% of the accounting pros surveyed rely on “existing knowledge” to determine their tax liabilities. In fact, exactly half of the respondents haven’t updated their sales tax compliance processes in over six months or couldn’t remember when they were last evaluated.
One of the prevailing methods for determining tax rates is using zip codes (35%) and nearly half of respondents still perform the tedious task of looking up tax rates on state websites.
Moreover, 88% of companies do not use cloud-based automation to file and remit sales tax, while 38% use on-premises solutions that are supported and maintained by costly IT groups.
The case for automating sales tax management
There are over 14,000 taxing jurisdictions in the U.S., many of which are now requiring out-of-state companies across many industries to either collect sales tax and/or report use tax to its out-of-state customers for the first time. Even if federal legislation that effectively ends sales tax-free online shopping isn’t passed, the influx of state rules and regulations will only make compliance more complicated. The solution? Automating the process with a cloud-based sales tax solution that resides within your business.
There’s a reason automated solutions represent a cost-efficient and comprehensive solution to the ever-present risk of state audits. They are, in essence, a revolutionary change in a marketplace that has come to recognize a consistent process and predictable workflow for all transactional tax reporting as fundamental to any audit strategy.
Automation is the clearest and best method to graphically display policies and procedures for a competent and, most important, compliant system of sales tax reporting. Organizations can have peace of mind knowing their automated solution meets and exceeds the standards auditors expect from each business. Just as important, automated tax reporting can greatly diminish audit vulnerability, a best-case scenario for every business.
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