How Sales Tax Affects Your Business

8/3/2019 How Sales Tax Affects Your Business

http://slidepdf.com/reader/full/how-sales-tax-affects-your-business 1/8

Sponsored by Avalara, Inc.

Copyright © 2013



Page 2 of 8. How Sales Tax Affects Your Business © Avalara 2013

Sales tax is in the news more than ever today with national legislation

being debated in Congress, and many states struggling to gain a hold

on internet sales and the related tax liabilities. The current controversies

between a certain internet seller and a number o state revenue ocials

certainly made the ront page in 2011. Sales tax policy is a ascinating

subject and the internet revolution is pushing discussion o sales taxes

to the public center. These developments indicate the high level o concern

held by business leaders, politicians and bureaucrats in the sales tax eld. The current ocus on sales tax policy will hopeully produce a more rational

sales tax compliance environment. Some day.

For now, we need to acknowledge that the sales and use tax

compliance arena is raught with challenges or businesses o all sizes

and types. Sales and use taxes impact your business on a daily basis with

legal liability requirements and they aect your business on a broader

scale by their infuence on strategic decision-making. The eects o sales

and use tax management and compliance are not limited to traditional

retailers either. All types o businesses must be aware o the instances o

sales and use tax, and the challenges presented by calculation, collection

and remittance o sales and use taxes and documenting tax-exempt sales.

Sales and use taxaffects all businessesin some universal ways




Shifting rates& shifting boundaries

Sales and use tax rates are stable in some states, but tend to be volatile in

others. In places where sales and use tax rates are more prone to change

based on political whim, rates can change on a monthly basis. Even in more

stable jurisdictions, rates vary rom township to township, city to city, or

county to county. Rates can vary based on the type o product or service

you sell, who your customer is, even the manner by which your customer

uses or consumes what you are selling.

Counties, cities, townships, re districts, school districts, and even economic

incentive zones are continually expanded, established and otherwise giveneect in the United States. In some states, local sales and use tax jurisdictions

are oten little more than gerrymandered ink spots, bounded and strung

together by individual lots or alleys. Traditional location methods such as

the US Post Oce’s Zip Code Service are simply not designed to support or

delineate sales and use tax boundaries, yet many companies believe them to

be adequate.

How Changing Rates and Shiting Boundaries Aect Your Business:

Identication o current rates and boundaries requires an on-going eort

or any business. Even businesses that do not regularly sell outside their

own physical location are subject to changes in the locations they do serve.

For expanding businesses, new locations and new products or services

present additional challenges as existing approaches and solutions mustbe modied or re-developed to meet the need o an expanded product

or service line. Finally, don’t orget that rates and boundaries are the core

elements o your sales tax compliance solution.

Put another way: Inaccurate rates and boundary inormation makes your

company’s otherwise sound management and compliance eorts result

in materially inaccurate calculation, collection and remittance. This means

your business may be paying less or possibly more than required and have

increased audit risk.

1.




Aggressive taxability rules

In general, the universe o taxable items increases in scope as time goes on.

As our economy gradually evolves rom a goods-centered exchange to a

services-centered exchange, states and localities have reacted by expanding

their denition o taxable items and services. In addition, businesses who

regularly sell non-taxable and taxable items or services incur additional risk

o adverse assessments where the two items or services are less distinct.

Revenue-strapped states and localities consistently expand their own

interpretations o what are and are not taxable sales. States routinely

change exemptions and basic taxability rules, but they also tweak theirexisting rules by issuing restrictive or otherwise aggressive rulings, opinion

letters, bulletins and other inormational publications. The expansion o

taxability rules is not limited to newly taxable items or services, but is also

due to inclusion o more transactions under the sales and use tax umbrella.

As a result, transactions like leases, rentals, deliveries, or personal-type

services are subject to sales and use taxation in more and more places.

How Aggressive Taxability Rules Aect Your Business: A company must

respond to aggressive taxability rules and denitions by dedicating the

time necessary to remain current with states and localities’ interpretation

and enorcement. Inaccurate understanding o the rules applicable to

your business can leave you with little cover in the event o an audit.

Put another way: Making a mistake on taxability will result in materially

mis-stating the amount o sales tax owed and puts your business at risk

o a damaging negative audit nding. It’s bad business to go back to your

customer and request additional sales tax due to your mistake.

2.




Regular timelycompliance burdens

States and localities expect, and need, these tax revenues. They

expect taxes on time, in the accurate amount, accompanied by a

properly lled-in tax return, and perhaps most importantly, they reserve

the right to punish businesses that do not meet the aorementioned

requirements. To that end, the states regularly pepper businesses with

notices, requests or inormation, and less oten, but perhaps more

daunting, audits. Each o these tools inlicts a certain and distinct

cost on your company. But even beyond the risk o adverse indings

or assessments, honest evaluation o the economic and opportunity

costs o regular sales tax compliance usually reveals a signicant burdento businesses o all sizes.

How the Regular Timely Compliance Burden Aects Your Business: Filing

the accurate amount o sales and use tax due, on time, and accompanied

by an accurate return are the nuts and bolts o any business’ sales and use

tax compliance solution. The time and resources required to accomplish the

work “on the ground” to regularly comply with sales tax legal requirements

are absorbed in your nance oce’s overhead. The monthly or quarterly

iling cycle crush may even require reallocating resources away rom

activities more closely associated with actual revenue collection and prots.

However, the eect o regular timely ling may also be measured by

headaches. Rule changes, e-le requirements, changes in orms, changesin ling requency, or even monthly rate and boundary changes all present

challenges on a regular basis. An otherwise minor mathematical error or a

mislabeled address eld can result in months o corrective actions to undo

what has been wrought. Even sta turnover, or leave time, can result in a

cascade o inaccurate or late lings.

Put another way: Much o the hard work expended to calculate and

collect sales tax is lost when the burden is not handled in a timely

and accurate manner.

3.




Non-taxable transactionsRetail businesses, related entities, exempt organizations and governments

are just some o the types o customers who do not expect to pay sales tax.

In act, unocial polling suggests many will gladly not ever pay sales tax

unless you ask or it! Unortunately or your company, the vital inormation

required to support an exemption rom sales tax must be maintained by you,

the seller. That’s right, the administrative burden o exemption management

is on the seller. Your customer’s status as a legitimate exempt purchaser

must be assessed by you, and you must maintain the documents and

transaction details upon which you made your decision. Bottom line: the

burden o proo is on the seller when the state eventually makes a visit

expressing concern about exempt sales.

How Tax Exemption Certifcate Management Aects Your Business:

For exempt sales, the core documentation required is some orm o

an Exemption Certicate. The Certicate entitles the customer to make

purchases exempt rom sales tax. The actual Certicate environment is less

than precise however, as some certicates are limited to purchases o only

certain items, others are limited to certain items used or the completion

o a certain project; some certicates provide a ractional or percentage

exemption, while others are date-sensitive. The proper application o

each customer’s exemption certicate to each sale is critical to avoiding

improperly exempted sales.

Put another way: It’s your job to manage the exemption certicatespresented by your customers to minimize the risk o materially understating

taxable sales. Lack o proper documentation o tax-exempt sales can cost

you money.

4.




Nexus and the rightto demand collection

In the legal sense, nexus describes the connection between two or more

participants, interests or concepts. Specically in the world o sales tax,

nexus reers to the connection a seller has with a state. Nexus is the legal

connection that empowers a state to demand collection and remittance

o a retail sales tax.

How Nexus Aects Your Business: Nexus is the legal peg on which states

hang their collection hat. Business activities such as physical locations,

employees, order processing or storage intuitively trigger nexus; but other

activities such as contracts with independent agents, making deliveries,business arrangements with aliates, leases, or even a simple business

registry can give a state the power to require collection. Strategic decisions

about these and other activities impact nexus and thus impact the way your

company will do business in the uture.

Put another way: Once established, nexus with a given state or locality

exposes your business to administrative sales tax collecting and return

ling burdens, so make sure your expansion strategy is accompanied by

a sales tax solution.

5.




Avalara may have patents,patent applications, trademarks,copyrights, or other intellectualproperty rights governing thesubject matter in this document.Except as expressly provided inany written license agreementfrom Avalara, the furnishing of this document does not give youany license to these patents,trademarks, copyrights, or otherintellectual property.

Learn more about AvaTax today. Avalara—Making sales tax less taxing.

Author:

SHANE RATIGAN began his career as a self-employed business owner.

After 10 years in the motorcycle business, he returned to college to gain a

Bachelor’s in Accounting and a Bachelor’s in Business Administration. Hewent on to earn his Juris Doctorate at Syracuse University College of Law in

New York and his LLM Master’s of Taxation at the University of Washington

in Seattle. Shane has spent several years counseling small business owners

on tax and succession planning. He is a licensed attorney in Oregon and

Washington. Shane currently works in sales tax law and sales tax compliance

with Avalara, a Software-as-a-Service end-to-end sales tax solution for

businesses of all sizes.

The take away message

Sales taxes, and the compliance challenges they present impact

your business on a daily basis. The shiting sands o changing rates,

boundaries and rules, regular timely ling requirements, exemption

certicate management and even the way your company expands and

grows are all signicant issues aected by sales tax. These issues aect

your business on a daily basis due to the pressure sales tax compliance

exerts on administrative resources; and on a broader strategic scale due

to the costs, obligations and pitalls o becoming a revenue collector or

states and localities.

Your business must perorm accurate calculation, collection and

remittance o sales taxes. In addition, you must properly document

tax-exempt sales. Take time now to assess how your organization is

meeting the challenges required to ully comply with sales and use tax

obligations. Be aware o the many ways sales tax compliance aects your

business. Investigate this now in order to make inormed decisions to

more eectively manage your business needs and reduce risk.

Documents

How Sales Tax Affects Your Business