Stop rolling the dice when it comes to sales and use tax audits
10 ways to improve your odds at the audit table
Sales Tax Management Is No Game of Chance
"…companies that are not transparent and proficient in their sales and use tax practices are opening themselves up to any potential fine or penalty that the government issues them - with no means of defence or protection."
-Aberdeen Research Brief, June 2011
It’s great to be a high roller when you are visiting your favorite Las Vegas hot spot. But it’s not quite as rewarding when your entire business is at stake. Without even knowing it, that is the kind of high stakes gamble that many business owners are making when they fail to take adequate care addressing their sales and use tax liabilities.
Sales tax might seem like penny stakes, but it takes just one audit to elevate your sales tax costs from small change to a massive investment. As more state and local authorities seek to address revenue shortfalls, they are increasingly turning to sales and use tax as a source of funds. Sales tax audits are easy to administer and have a high rate of success for government authorities. From a company’s perspective, these audits add to the cost of doing business in a number of different ways:
While sales tax is designed to be a pass-through tax paid by the consumer;and remitted by the seller, audit assessments are paid out of the seller’s profits. You can’t go back to your customer and collect the missed amount.
A company under audit exposes its clients and vendors to an audit as well. The resulting damage to relationships can be hard to repair.
Audits cover multiple years, so a single error can have a big impact.
Staff time is redirected to audit activities rather than more profitable pursuits.
Assessments and non-deductible penalties can quickly add up.
There is no reason for today’s businesses to treat sales tax management as a game of chance. Sales tax management no longer has to be a choice between inadequate sales tax management and a heavy investment in staff. With the help of the right solution, companies can take control of their sales and use tax calculations, collections and remittance without either breaking the bank or incurring unnecessary risk.
Here are 10 ways to improve your odds at the audit table...
1. Ante up.
“If you ain’t just a little scared when you enter a casino, you are either very rich or you haven’t studied the games enough.”
Terrence “VP Pappy” Murphy
Start at the source.
The best way to minimize your risk of losing big money at the audit table is to assess and collect the right amount of sales tax on every sale. Once a sale is completed, any undercharged amounts will have to be paid from your corporate profits (and if discovered during an audit, there will be penalties added). That means that your sales tax tools must be tightly integrated with your invoicing tools—including point of sale systems in a retail environment and accounting software in others. They should integrate seamlessly and in real time.
Today’s web-based solutions can validate addresses and verify your handling of jurisdictional boundaries. Using satellite-based technology, some companies can pinpoint the appropriate amount of tax due and the proper jurisdictional boundary down to the rooftop level.
2. Choose the right table.
“Sometimes a 3-1 favorite loses. That’s why they call it gambling, and that’s why they keep flipping over the cards.”
Make sure you are working from the correct tax rate table.
Every year, there are more than 500 sales tax rate changes across jurisdictions in the United States. If you are relying on manual updates or even downloaded tax tables, you are likely to miss a critical change in rates. The cost of collecting the wrong amount of tax for even a few days can be quite high. By working with a web-based provider of an integrated solution, tax rates are always current, and you eliminate the chore of staying on top of rate changes. You also improve your odds of collecting and remitting the correct amount of tax.
3. Know when you cross the line.
“There is but one good throw upon the dice, which is, to throw them away.“
Understand nexus rules for states in which you operate.
Under rules of multi-state taxation, no state can tax an entity unless that entity has established a minimum level of connection with that state. That minimum connection, called nexus, is typically triggered by a company’s physical presence in that state. Nexus can generally be established in one of the following ways:
Renting or owning a building
Hiring an employee
Maintaining an office
Hiring an independent contractor
Storing goods or inventory
Making deliveries in a company vehicle
Offering repair or maintenance services
These rules can be applied differently, so be sure to review the rules for any states in which you plan to conduct business. When in doubt, consult your CPA or other accounting/tax professional.
4. Keep your chips close at hand.
"If you must play, decide upon three things at the start: the rules of the game, the stakes, and the quitting time."
Keep exemption certificates in a safe but accessible place.
In the event of an audit, you need to be able to quickly show proof of exemption for non-taxable sales. Rather than searching through piles of paper, with the right system in place, you can quickly retrieve electronic documents, associate them with individual transactions, and validate certificate numbers. These systems can also let you know when certificates are about to expire so you can renew them as needed.
5. Know the rules.
“Diligence is the mother of good luck.”
Tax calculations vary based on whether you are operating in an origination or destination state.
Origination states view sales tax transactions in the state as payable in the jurisdiction where the item is sold. Destination states view tax as payable based on the seller’s location if that is where the item is received, but otherwise taxes are payable to the jurisdiction to which the item is delivered. For companies filing returns in any of the 24 states who have adopted the Streamlined Sales and Use Tax Agreement (SSUTA), the destination view of determining tax is required. An automated solution can ensure that you are applying the appropriate tax rules to every transaction.
6. Presentation counts.
“A gambler is nothing but a man who makes his living out of hope.”
Organize your information.
Make sure that you can quickly substantiate your compliance with rate and rule changes in each jurisdiction in which you operate. There are more than 11,000taxable jurisdictions in the United States. Can you show your approach to staying current on all of them in the event of an audit? If not, you need to consider an automated, integrated solution to help you stay organized.
7. Cover your bets.
“The smarter you play, the luckier you’ll be.”
Don’t forget about use tax.
While sales tax can be complicated enough to manage, businesses also have to worry about use tax. Use taxes can apply when an out of state buyer purchases an item for use in his home state but pays no sales tax (or a reduced amount of tax) to the seller’s state. In this case, the purchaser is expected to voluntarily file a use tax return with his home state to remit the taxes due. Use taxes are normally an easy source of revenue for an auditor. Once the auditor finishes reviewing sales invoices for under-collected sales tax, he or she will immediately turn his or her attention to purchase invoices to locate sources of underpaid use tax.
8. Know the players.
“The lesson here is that being proactive, systematic, and judicious in improving sales and use tax management pays greater dividends than being reactive to audit situations.”
Work with a reputable vendor.
Don’t try to improve your sales and use tax compliance on your own. Team up with a software vendor who can help you automate the process. Look for a vendor that offers a range of sales tax management services from calculation and exemptions to return filing and remittance. Look for tools that integrate with not only accounting applications, but also e-commerce and point-of-sale solutions. Because these providers will function as intermediaries between you and taxing authorities, seek out third party endorsements from accounting and business publications. Look for a seal of approval like the Certified Service Provider designation awarded as part of the Streamlined Sales Tax Project. The right vendor can be the difference between winning and losing at the audit table.
9. Know the table stakes.
“Given the automated nature of online purchases, vendors should evaluate tax management solutions that easily integrate and interoperate with their existing e-commerce platforms to further support this automation – providing real-time tax calculations based on applicable rates, facilitating the consumer buying process.”
Certain industries are more likely to be audited than others.
Companies that process a large amount of cash are prime candidates for both sales and income tax audits. In addition, organizations selling directly to consumers either through physical stores or on the web are subject to regular scrutiny. Because of the speed at which they operate and their ability to reach multiple geographies, these businesses are also most likely to be late or inaccurate in applying rate and rule changes at the point of sale. They are often unaware of their nexus issues and find themselves exposed to audit adjustments. For these businesses, an integrated automated solution that provides real-time rates and rule validation is a necessity.
10. Learn from the pros.
”In a dynamic regulatory environment, where tax rate changes are numerous and frequent, it becomes apparent that human capabilities are at a disadvantage over software automation.”
--William Jan, Aberdeen Group,
“Effective Sales and Use Tax Management”
When the stakes are high, hire a professional to help you.
There are many organizations specializing in sales and use tax consulting and audit support. They can assist you in selecting and implementing a sales tax system and responding to nexus and audit inquiries. In addition, leading automated sales tax vendors have their own team of professionals available to assist you, both in building your compliance strategy and in handling an audit. The right team can make the difference between success and failure at the audit table.
Put away that rabbit’s foot
“The champion makes his own luck.”
Many owners and managers are entirely unaware of the risks they are taking by failing to properly address this important part of their business. While the amounts collected on individual sales tax transactions may not be large, the cumulative impact of an error across an entire business can be devastating.
By applying the right tools to your sales and use tax management, you can greatly improve your odds of successfully handling a sales and use tax audit. Automated sales tax management solutions can help you collect the correct amount of tax at the source and keep you current with tax rate and rule changes. The right solution can also help you monitor nexus issues, organize your exemption certificates, and document your compliance with state tax laws. By working with a reputable vendor, being aware of your audit exposure, and seeking out professional help, you can further improve your odds of success during a sales and use tax audit.
Today’s organizations can no longer afford to gamble with this important area of tax. Thankfully, today’s web-based sales tax solutions make affordable, comprehensive solutions available to businesses of every size. Organizations that use advanced sales tax management tools are no longer subject to the whims of Lady Luck— at least when it comes to sales tax, they are in control of their own outcomes.
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