7 deadly sales tax sins - Common sales tax errors & oversights
It’s easy to be lured into a false sense of compliance when it comes to managing sales tax. No one likes calculating, collecting, remitting, or filing taxes, nor do they enjoy tracking exemption certificates, sales tax holidays, or product taxability. Because of this, many companies relegate these tasks to the back office, assuming all is well. In fact, this assumption may be leading some companies to the point of no return. These seven sales tax sins are common errors with potentially devastating consequences. Each sin listed below is followed by remedial actions.
1. Misunderstanding consumer use tax
Many businesses fail to understand the importance of consumer use tax. Yet consumer use tax is one of the most common causes of miscalculated and unpaid tax is found in audits. Use tax is defined as a tax on the use of tangible personal property (TPP) not otherwise subject to sales tax. Generally speaking, use tax is owed when taxable items are purchased without sales tax or with less tax than the applicable sales tax rate. Certain states, like Virginia, are starting to hold sellers accountable for uncollected use tax.
The majority of accounting professionals (52%) think it would be easier to complete a marathon than it would be to understand sales tax compliance laws for their company. – Wakefield Research
- Learn the difference between sales and use tax.
- Develop a written use tax policy.
- Review all non-resale purchase invoices and accrue consumer use tax where appropriate.
- Properly track and account for withdrawals from resale inventory.
2. Missing or invalid sales tax exemption and resale certificates
Sales tax exemption certificates enable a purchaser to make tax-free purchases that would normally be subject to sales tax. Resale certificates are provided to suppliers to substantiate that the items purchased are intended for resale only and therefore are exempt from sales tax. Yet certificates expire or may be invalid, potentially leaving the seller liable for uncollected sales tax. Developing an efficient and automated process to manage certificates is key for companies to remain sales tax compliant.
- Create an audit trail for certificates.
- Update product and service exemption rules in each jurisdiction in which you do business.
- Be able to quickly generate an exemption certificate summary report.
3. Application of the wrong sales tax rates, rules and boundaries
Failure to track changes in rates, rules, and boundaries can lead to disaster. There are over 11,000 jurisdictions in the United States and countless changes to track each year. Finding accurate information on these changes is like finding a needle in a haystack.
Of those surveyed 40% use state websites and tables (backed by ZIP codes) to find the correct sales tax rate. – Wakefield Research
- Register in states where it’s required.
- Use an automated solution such as Avalara AvaTax to track rate, rule and boundary changes and save valuable resources and potential audit fines and penalties.
4. Incomplete product and services taxability research
Failing to correctly apply the right sales tax rates and rules to the correct product and service is a hazardous and potentially costly error. States change product and service taxability rules with great regularity, and the onus is on the business to track these changes.
1 in 3 accounting professionals do not know where their company has nexus. – Wakefield Research
- 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. Filing the wrong forms and remitting sales tax late
Filing and remitting late or incorrect tax forms is a red flag to state auditors. Businesses often struggle to identify the correct form to use in each state.
- Review whether your filing schedule has changed in applicable states.
- Find out whether the states where you have to remit sales tax have implemented new e-filing or pre-payment requirements.
6. Neglecting changing sales tax nexus laws
Ignoring changing nexus laws is wrong. While most business people 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 resulting from South Dakota v. Wayfair, Inc. Numerous states have passed sweeping changes to state nexus laws that require many remote sellers to collect and file sales tax in more states.
Most accounting professionals surveyed believe they would lose if they were to ever contest a government audit. – Wakefield Research
- 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 by engaging contract labor, attending out of region trade shows or other nexus-creating activities.
7. Passively accept negative tax audit findings
Failure to challenge negative audit findings is a mistake. State auditors routinely publish information regarding how to appeal a negative audit finding, or contest a final decision. These typically include specific instructions about how to disagree with a final finding.
91% of accounting professionals who plan to implement a new automated or financial solution will do so within the next 12 months. – Wakefield Research
- Review your rights and responsibilities (on most state audit department websites).
- File a timely appeal.
From inventory management, to sales, to finance, automation with Avalara AvaTax gives companies the agility, flexibility, and efficiency they require in a still-recovering market. The alternative — handling these processes manually – can hinder rather than promote growth. Manual sales and use tax management is prone to error and directs staff time to pass-through rather than revenue-generating activities. Automation allows growing businesses to leverage limited resources of time and money without sacrificing productivity.