Scary Sales Tax Stories: Sales Tax and the Labyrinth of Compliance
- Sales and Use Tax
- October 31, 2014 | Gail Cole
In Harry Potter and The Goblet of Fire, a labyrinth is the last task of the Triwizard Tournament. Mazes can be short and simple—a laugh and a lark at a pumpkin patch on a Saturday afternoon. They can be long and clever and frustrating. The one created by J.K. Rowling is the stuff of nightmares, a malevolent dark force that can turn you against yourself.
The more a business expands, the more sales tax management can feel like negotiating the Triwizard maze. It can be hard to find your way through the labyrinth of state and local sales tax laws, especially for businesses selling numerous products to multiple jurisdictions. Miscalculation may not throw you at the feet of the murderous Voldemort, but it can expose you to the tax authorities and increase your audit risk.
Don’t get me wrong—tax authorities are not like Voldemort, intent on amassing power at any cost. Tasked with upholding and enforcing tax law, they’re more like employees of the Ministry of Magic. But as Harry Potter discovered, life is easier when they’re on your side, working for you rather than against you.
The sales tax compliance challenges facing businesses today are similar to the three tests faced by the young wizards during the Triwizard Tournament. Here are three top challenges businesses must overcome when navigating the labyrinth
1. Solve Unimaginable Jurisdiction and Product Complexity
There are more than 12,000 sales tax jurisdictions in the United States today, and close to 10 million taxability rules related to products and services.
While some states like Connecticut and Maryland have only a single sales tax rate, 38 states have numerous local tax jurisdictions. A business selling only one product nationwide would find compliance challenging, because products are subject to different rates and rules in different states. Compliance becomes a scary maze for businesses selling multiple products to multiple jurisdictions.
The average retailer stocks 45,000 SKUs (Stock Keeping Unit), and each one has its own UPC (Universal Product Code). Walmart stocks approximately 142,000 different products. Amazon, 200 million. No wonder managing sales tax feels like finding your way through a complicated maze.
2. Don’t Get Caught in the World Wide Web
To be successful in today’s market, most businesses are expanding their reach and accessing more customers via the internet, tablets and other mobile devices. This has sales tax implications.
States rely on sales tax revenue to fund essential services and are fighting for the right to tax sales by remote sellers without nexus--the minimum level of physical connection within a state that enables a taxing authority to require a seller to register. Twenty four states have click-through nexus policies; here are just a few examples:
With more states passing laws like these, and with the possibility of the Marketplace Fairness Act or a similar piece of federal legislation one day granting states the right to tax certain out-of-state sales, businesses that sell across state lines need to understand where they may have nexus on a state-by-state basis.
3. Avoid Product Taxability Attacks
In addition to the above challenges, different states tax products differently. For example, states frequently exempt certain products from state sales tax. These include a range of products sold at grocery outlets, convenience stores, and drug stores. For example, grocery items are usually tax-free, while prepared or to-go items are taxable. For retailers using UPCs, one would assume they would take all items coded “grocery,” and black out sales tax. If only it were that easy.
California Target customers angered by tax on to-go coffee.
Two California consumers contend that Target “represented that it properly was charging and in fact charged them sales tax reimbursement on sales of hot coffee sold ‘to go,’ when, according to plaintiffs, the tax code rendered such sales exempt from sales tax.” (Avalara TaxRates)
Walmart sued over 21 cents.
A Connecticut man sued Walmart for incorrectly assessing sales tax on shaving cream purchased with a buy-one-get-one-free coupon.
Unlike the actual Triwizard Tournament, businesses do not have to face the sales tax compliance labyrinth armed only with wands. There are resources available to help you along the way. In addition, automated sales tax software as a service helps keep sales tax compliance in scale: a pumpkin patch corn maize rather than the nightmarish labyrinth of the Triwizard Tournament.