When state auditors called Brian Terrell wanting to see his firm's books, he thought he had nothing to hide. "There's absolutely no reason I should have stood out. We were small, maybe $400,000 in revenue, I thought I was doing everything correct," Terrell says of his Dallas-based business.
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Because Terrell & Terrell, CPAs, was so small, the auditor evaluated all the firm's invoices for the past four years and found a $4,000 variance in state and local tax (commonly called SALT) it had failed to collect.
"That was embarrassing because the first thing they encourage you to do is call your customers," Terrell says. "Imagine buying a car and getting a call saying, "We forgot to charge you tax, would you mind paying it?' I wrote the best letter, asking if there's any way they could help me and a lot of the customers wrote the checks."
Terrell's experience is not unique. Most companies learn about SALT in a reactive way and come running to their accountants when they encounter problems. A bigger problem is that a lot of those accountants don't know much about SALT, either, or don't want to take on the liability.
"I started searching for someone to help me similar to the way a tax preparer would in an IRS audit, but it didn't exist," Terrell says. "I was sharing an office with five other CPAs doing tax work day in and day out, and they wouldn't even touch it. They knew anyone calling [for advice] was in a mess."
That was 12 years ago and Terrell has since gone on to become a Sage Accpac reseller who recently took on a project as part of his other company, CodePartners, to integrate a Web-based sales and use tax software called SpeedTax into Accpac so that the compliance work could take place behind the scenes for his customers, with transaction-based pricing ranging from 10 to 45 cents.
With some experts predicting an average of two changes in sales tax rates each day, companies either need to bring in a SALT specialist or install software such as SpeedTax that provides real-time calculations, integrates into their accounting system and provides detailed reports in case an auditor comes knocking, allowing them to be proactive instead of reactive, Terrell says.
SpeedTax, Avalara, Sabrix and other sales tax software vendors have established referral programs for accountants to send their clients to them for help. About 250 to 300 firms are part of Avalara's Accountants Network, which essentially serves as a referral service, according to Marshal Kushniruk, executive vice president of strategic accounts and customer experience for Avalara.
"The value proposition for accounting firms is they don't want to do the tedious calculations, but they can fulfill returns for clients or have us do it," Kushniruk says.
The challenge the vendors are facing is that many companies that have problems don't even know they have a responsibility to collect state and local tax and many accountants don't know how to determine which of their clients fall into that category.
Avalara provides a Perfect Prospect Profile to characterize which companies may be targets. Red flags go up for those entering a new market, doing business in more than one state, having offices in more than one state, conducting business on the Web, and recently undergoing an audit (a statistic offered by SpeedTax states that more than 45 percent of companies that purchase technology to ensure "accuracy and a defensible audit trail" do so after an audit).
SpeedTax created a free online CPA Questionnaire that allows accountants to determine their clients' sales tax audit risk. (See related story, "Compliance Checkup.")
Last October, CCH expanded its offerings to include a suite of products called CorpSystem for corporate tax professionals to not only calculate rates but determine their end-of-month liability, prepare returns and manage their exemption certificates (which are sometimes required to prove they were not required to collect taxes).
The Tax & Accounting business of Thomson Reuters has a sales tax compliance product line called OneSource Sales & Use Tax, which it markets to larger companies with multinational operations, and also offers various guides for users to understand the ins and outs of SALT.
In May, the Tax & Accounting business of Thomson Reuters launched a consulting services arm that competes with the Big Four and second-tier accounting firms to provide such things as taxability analysis studies, nexus determination to see if they even are obligated to collect taxes in the first place based on their legal presence in certain states and voluntary disclosure agreements to reduce penalties for unremitted tax.
They also can evaluate merger and acquisition targets so companies can be alerted to possible exposures and potentially negotiate purchase prices as a result, according to Rachel Stephens, manager of Consulting & WorkFlow Services for the Tax & Accounting business of Thomson Reuters, adding that services cost roughly $250 per hour.
Vendors aren't the only ones looking to help firms help their clients.
Several consulting firms exist throughout the country that will work with clients directly, in conjunction with their accountant or behind the scenes.
Wendy Ezell started her Grapevine, Texas-based practice after serving as a SALT specialist for both Arthur Andersen and Grant Thornton. When she handles federal tax returns for clients, she interviews them about their overall business to determine if they may have sales tax issues.
"I often find they are making attempts to [collect taxes], but aren't doing it properly. I attempt to get them healthy and into remittance," says Ezell, whose clients range from small mom and pops to companies with $75 million in revenue. "A good CPA would have to take notes and listen for clues."
One of the most obvious clues is when a company ventures into another state, Ezell says, noting that what's taxable in one state may not be taxable in another. For example, a client may boast that he sold $10,000 into Montana for the first time.
"They think they're being friendly, but they're really giving me what information I need and they didn't realize why they had to tell me," she says.
Accountants who are looking to identify which of their clients may encounter nexus issues should run a report with revenue by state, and start managing the top 10 states, doing voluntary disclosure to get them in compliance before the state tries to, Ezell advises.
It's always better if clients tell their accountants they are planning to do something beforehand. For example, Pennsylvania penalizes companies that don't sell a certain amount into the state, which can end up costing them more than they collected in revenue there, Ezell says.
Another example boils down to local jurisdictions that may offer incentives for businesses considering opening new facilities in the area.
"It's rare you can get incentives after you signed a lease and broke ground," says Diane Yetter, president of Yetter Consulting Services, a sales tax consulting firm based in Chicago.
Yetter started her career as a sales tax auditor for the state of Kansas in 1985 and served as a sales tax manager at Arthur Anderson in 1989 and also helps clients with systems analysis and software implementation. She works closely with about 15 CPA firms throughout the country, sometimes billing them and sometimes billing the client, depending on the firm's desires and the complexity of the situation.
Yetter believes her firm has been successful because she doesn't do income tax work or general business consulting, so other accountants don't fear they may lose business to her.
"Companies are relying on their CPAs to make sure they're legitimate. If the CPA doesn't know when the company is doing something that's putting the company at risk, the CPA is putting themselves at risk," Yetter says. "CPAs have an ego of feeling they can be everything to the client. By not bringing in the specialist, you are at greater risk of losing your client. If the state assesses them $1 million and it's going to put the company out of business, you can bet the company is going to sue the CPA."
States are growing more aggressive about going after people who don't pay as the economy worsens and they need to fill their coffers, Ezell says. (Estimates show about 50 percent of state revenue comes from sales and use tax and billions of dollars go uncollected every year.)
They are lurking at truck stops to watch how many times trucks cross the state borders, checking Yellow Pages to see where companies are advertising and looking at Web sites with pull-down menus to see in which states they are willing to take on work.
Sabrix research found that the total cost of compliance for small businesses is $130,000 a year, including $10,000 on penalties and interest.