Over the last months, plenty of attention has been focused on the enormous impact to sales and use tax from the Supreme Court’s decision in the Wayfair case. This sweeping wave of change means companies who historically only had to be sales tax compliant in a few states now may face the tremendous burden of multi-state sales tax obligations.
How Did We Get Here?
Previously, companies were only subject to sales tax obligations in states in which they had a physical presence. Physical presence could come in the obvious forms such as offices, employees, inventory, customer visits, and even third party sales agent nexus. More obscure nexus-creating activities may include trade show attendance, click-thru marketing agreement, and affiliate relationships. Now, with the Supreme Court decision, states can impose nexus based not only on a physical presence, but also based on economic thresholds.
Once your nexus footprint has been established, look at the taxability of goods and services sold. Multi-state sales tax compliance becomes a challenge because not every state imposes tax on the same items. In most states, selling tangible personal property is taxable – although some states have special exemptions or reduced rates for clothing and food. The taxability of services is tricky. Many states tax services, including repairs, installation, and delivery. For technology companies, the waters get murkier with digital goods, SaaS, and consulting services.
Steer Clear of Taxability Problems
When a company’s business operations are complex, extra time and attention should be paid to ensure taxability decisions are correct. Failure to collect sales tax could result in liabilities under audit. Over collecting sales tax, on the other hand, is a customer service and PR nightmare. Once you identify where you need to collect sales tax and which goods and services are taxable, the real work begins. Where are you going to get all the tax rates? More than 10,000+ taxing jurisdictions exist in the United States. How is your billing system going to keep track of these rates which are constantly changing? Do you have the manpower to update the system, or is a real-time solution appropriate? Many sales tax solutions that interface with your ERP system are worthy of investigation.
Get Ready for More Tax Returns
Beyond collecting tax, an increased number of sales tax returns will need to be filed. Do you have in-house resources to comply with this increased burden? Or is outsourcing a more effective solution? Review all options to find the solution that makes the most of your resources for maximum tax compliance.
With increased filing requirements in many more states, collecting and maintaining customer exemption certificates will also be more important than ever. Begin to think about the most effective process. Should it be a customer service function, an accounting function or a tax department function? Make sure the people responsible for collecting, validating, maintaining, and renewing certificates are properly trained.
Finally, as your company’s sales tax obligations expand to include more states, the likelihood of more sales tax audits increases. Even with the best processes in place, sales tax audits take a toll on time and resources. Time spent now to put best practices in place will provide a significant return on investment.
In the coming months, and likely the coming years, sales tax as we know it will be changing. Make sure your company takes the integral step to be well positioned to navigate what lies ahead.
Cherry Bekaert’s sales tax team is available to help your company comply with the new sales tax obligations. Visit our website for complimentary resources such as blogs, webinars and checklists.
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