Sales tax is not top of mind for most executives, but it is something most businesses have to manage at some level. No matter the size of your business, if you are selling a taxable product or service and establishing nexus in specific states or jurisdictions, you have a sales tax obligation. And as states and the many other tax jurisdictions continue to adjust their statutes, it’s important to stay in the know.
How? Let’s start with your billing system.
Definitions and decisions
Your billing system (and its management) is the lifeblood of your sales tax compliance, your mechanism to make sure the correct sales taxes are assessed to your customers.
But often we see differences between a client’s billing system and their tax reporting. For example, you could be billing taxes within your system and yet haven’t filed a single sales tax return and haven’t tracked the tax data to be aware of a future filing obligation. Tax types and nexus pose other wrinkles.
Examining your billing system takes a few steps. First, examine your products or services. What if any of your products or services are taxable in a given state, and how do they get integrated into the billing system so the system’s tax decisions are appropriate?
Make sure too that you’re defined your taxable products appropriately. We’ve seen a product described one way, but the customer or engineer in product development might describe the product or service much differently. Definitions make a huge difference in taxability yet sometimes billing systems are rarely reviewed. Initial decisions on the definitions of products or services tend to last for years.
Where are those products or services are subject to tax, you then have the nexus issue. You commonly have economic nexus in a state where you’ve hit a threshold of annual sales volume (either in dollars or, in a decreasing number of states, numbers of transactions).
Many companies today are defining nexus on the economic standards established in the Wayfair case in 2018 – but people still consistently miss the nexus standard on physical presence. Your company may also develop new products, or other changes to your business may change your nexus map. Factors influencing this map – including taxability definitions and applicable sales tax types and rates – should be updated in the billing system at least quarterly.
There’s also frequently a disconnect between billing system management and returns management. This can include overrides that aren’t calculating sales tax at the local level; within states, there are often dozens of municipal and other local sales taxes, a particularly tough complication in home rule states like Louisiana and Colorado.
We often see companies charge and remit tax where a tax credit is available. These inaccuracies accrue over time in billing systems and, in some cases, are even corrected after the credit is now longer available.
Your billing system is one of your first defenses against such problems – if it’s managed and overseen right. In upcoming blogs, we’ll look at such other potential pitfalls as tax calendars, G/L management and the submission of returns.
(Learn more on our webinar “Don’t Test Your Luck: The Pitfalls of Sales Tax Compliance.”)
TaxConnex can help keep your business on top of your taxability and ensure you maintain sales tax compliance. Get in touch to learn how!
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