With the U.S. Supreme Court’s June 2018 decision in That means staying up to date on new policies across different states, and assessing changing tax rates and rules, along with transaction and invoice data residing in multiple systems that won’t go away any time soon. Many business owners will struggle to keep up with filing correctly, which is where you come in.
Here’s some advice to help your clients avoid costly errors and audit headaches, and focus on growth and success.
Understand each state’s tax laws and know your nexus. According to the Sales Tax Institute, nexus historically was always associated with a physical presence – the determining factor whether an out-of-state business selling products into a state was liable for collecting sales or use tax on sales into the state. That all changed in June 2018 with Wayfair. Now, sales or an “extensive virtual presence” – not just physical presence – is sufficient for creating nexus.
As a result, more states have started to pass sales tax laws and regulations imposing collection obligations based solely on the amount or number of sales or economic nexus made into their state. This is a tremendous change and makes your understanding of nexus in each state more important than ever.
Pay attention to changing filing requirements. Each state sets its own requirements for business sales tax filing and payments, with some states now requiring e-filing, especially for businesses with large tax liabilities. The only way to help your clients avoid costly and time-consuming errors is by knowing the available payment options and requirements in every state their business has nexus. Here’s a link for filing and payment options for each state.
Track required prepayments. At last count, more than 15 jurisdictions require prepayment from some businesses. The larger the sales tax liability, the more likely your clients will need to prepay. Prepayments are typically made on a monthly basis, but can sometimes be required by states as often as four times a month. To ensure accurate and on-time prepayments, help your clients develop a flexible filing schedule and update it regularly to capture changes.
Reconcile the sales tax payable account. To ensure accuracy over time, regularly reconcile the sales tax payable account with source documents. Do this by:
• Identifying the balance of their account at the beginning of the accounting period.
• Adding the total amount billed to customers.
• Subtracting the total sales and use tax paid, either electronically or by check, and account for any discounts a state may offer for filing on time.
• Reconciling this amount with the current balance of your clients’ sales tax payable account.
• Adding the total amount billed to customers.
• Subtracting the total sales and use tax paid, either electronically or by check, and account for any discounts a state may offer for filing on time.
• Reconciling this amount with the current balance of your clients’ sales tax payable account.
Regularly confirm filing frequency for each state. While your clients will likely be notified months in advance when a jurisdiction changes its filing frequency for sales and use tax returns, you still need to make sure they’re aware of the change. Historically, states sent all notices by U.S. mail, but with some of the new cloud-based software systems, some states now post e-messages in client accounts. Ensure clients have a system in place to regularly check their electronic account.
Accurately tax new products. With all the differences among states, it should be no surprise that different states have different rates for different products – and the same product may be taxable in one state and exempt in another. Identify the unique laws in each state that apply to your clients’ new products. If they are moving into a new state, do not assume their existing tax rates apply.
Stay current with exemption certificates. Inaccurate, missing or expired tax exemption certificates are a major cause of audit assessments. Regularly verify that each customer’s tax-exempt status agrees with the term of the exemption certificate on file – and replace any that aren’t current. If a company changed its name or acquired a new company, new exemption certificates may be necessary.
- Respond to notices. Failing to respond to notices in a timely manner can result in a levy against your clients’ bank account, a lien on their corporate officers or suspension of their business license. Notices can inform your clients of a number of things, including tax rate changes, changes in what is taxable or exempt, or an error in calculating or sending a return. In any case, not responding can only make the situation worse.
Use exact location, not ZIP codes. Each local jurisdiction is defined by a variety of often-complex criteria, and it is common to have multiple sales tax rates within a single ZIP code. As a result, relying on ZIP codes for sales tax rates can lead to applying the wrong rate, leaving out a special district tax or remitting sales tax to the wrong jurisdiction, leading to possible audits, penalties and return reconciliation. The only way to ensure the location is reliable is to use geo-location software that relies on longitude and latitude coordinates.
Provide Less Painful, More Powerful Solutions
As states increase the pressure to collect unpaid taxes to help balance their budgets, your clients could face a sales tax audit. Taking the time to review and strengthen all the processes noted above will minimize the cost of an audit and possibly errors.
As states increase the pressure to collect unpaid taxes to help balance their budgets, your clients could face a sales tax audit. Taking the time to review and strengthen all the processes noted above will minimize the cost of an audit and possibly errors.
By finding solutions that automate your clients’ sales tax collection, filing and remittance, you can help them eliminate all the complexity around sales tax compliance and audit preparation. With automation, you can ensure your clients spend less on bookkeeping, and automatically calculate and report sales tax correctly across their accounting software or e-commerce platforms.
