Have you heard the joke about the sales tax audit? No one has.There is nothing funny about a sales tax audit.
In the U.S., 45 states, the District of Columbia, 4,696 cities, 1,602 counties and 1,113 other jurisdictions impose some form of sales tax. In 2005, these taxing entities combined for over 3,000 changes in rates and rules - that is over 10 per business day. There is no joke about trying to keep current with this many changes for an everyday routine calculation. Remember, the accuracy of a sales tax calculation is never praised; it's only noticed when it is wrong.
Many times, sales tax compliance is not a priority for most accountants. Of course, the hurry-up-and-help call is made when the tax auditor arrives and everyone has to scramble. As states and local tax jurisdictions experience sales tax revenue decreases and their revenue expectations shrink, they will aggressively look for non-payers through enforcement of the nexus concept. Nexus is the legal means whereby a taxing jurisdiction can claim the right to tax your business based on its level of activity or presence within their borders. If nexus is established, then tax collection and remittance is required.
Accountants need to understand three major trends in the sales/use tax arena:
* Efforts by taxing jurisdictions to collect more;
* Law changes focusing on the unification of sales tax collection and reporting; and,
* The increasing need for sales tax management systems.
Accountants can take the lead to help implement systems for accurate tax calculations and avoid the very real sales tax audit headaches.
Cost of compliance
The cost of sales tax compliance has been expanding due to the increased complexity and enforcement of nexus, which translates to more districts for report submission. Nexus is finding significant traction in a growing number of states. For example, states are adopting a series of rules to establish nexus for companies that are doing business in the state without having a physical presence.
In general, factors establishing nexus are the presence of employees, agents or subcontractors; operations by related entities; ownership of property (personal and real) within the borders; sales calls; and delivery with company-owned trucks. The standard rule: If you think that a nexus regulation compliance issue exists for your business activities, it probably does.
To assist in making tax recordkeeping less complicated and help with uniform compliance, the Streamlined Sales Tax consortium was formed. The SST is gaining momentum since its enactment in November 2002. Currently, 42 states are members, with 21 states in full or partial compliance with the SST requirements.
The intent of the effort is to assist businesses with compliance, to increase tax collections for SST members and to reduce costs. Whether and how fast it can accomplish these goals will be determined over time.
At some point in the future, compliance may become mandatory for the Streamlined Sales Tax Program. Legislation is pending in both the U.S. House and Senate that would make the agreement mandatory. Companies should be prepared for change regardless.
If national legislation passes, it would give states authority to collect taxes from remote sellers that have no physical presence within their boundaries. In other words, businesses that have not voluntarily registered for the uniform system could be compelled to do so. Even without national legislation, changes at the state level could affect how many businesses must administer sales tax collection.
So where does the value add come in? When compliance is done right, there are no problems. When something is wrong - calculation, reporting, payment - there is a price. Any under-collection results in a cut in the expected profit margin.
If a sales tax audit shows amounts due from past transactions, it is almost impossible to collect from customers. When customers are charged the wrong rate, there is immediate ill will from the customer and perhaps even a lawsuit. Dell Computer was sued for overcharging 470,000 consumers nearly $24 million in sales tax between 1999 and 2005. The settlement required repayment. Similar cases against Dell are pending in five other states, and the price tag will most likely be over $100 million.
In addition, there is a time and dollar cost to answering customers' questions about improper calculations. Each answer requires time to take the call, retrieve the sales document, review the calculation and rate, and respond. If a refund is due, it must be issued, approved and tracked, including updating the sales tax return and financial accounting records. All the time spent on a $1 sales tax error could easily be worth over $50.
There are also system-wide requirements to update customer records, sales information data, and local, county, state and federal reporting requirements. Reporting can be particularly sticky based on the number of tax jurisdictions where the company does business. In addition, the specific filing dates for information reporting and payments made to the tax authority can vary. Doing the job right the first time will keep customers happy, reduce non-productive time and make any sales tax audit efficient.
SALES TAX MANAGEMENT SYSTEMS
Automatically maintaining sales tax tables within accounting software is where sales tax management systems shine. Updates and rule changes are downloaded automatically, with regional detail down to the Zip+4 level.
There are several STMS providers that offer a range of support, from full sales tax management to just updated sales tax tables. A competent system will track taxing jurisdiction information, including nexus, address validation, automatic jurisdiction assignment, customer exemptions, product and service exceptions, and sourcing rules.
Most vendors charge an initial fee, a monthly minimum, and a per-transaction charge. These charges begin at a few hundred dollars for set-up and a rate per transaction.
In addition to being easy to set up, an STMS system should:
* Directly integrate with the internal accounting/billing system;
* Be accessible over the Web for daily updates;
* Allow for sales tax holidays;
* Provide reports for all regulatory filings;
* Provide support for audits; and,
* Support additional reporting and archiving capability.
A new trend for STMS vendors is to offer managed returns services. This means a user can download from the STMS vendor the tax return form pre-filled with company data.
Due to the increased complexity and tightening enforcement, accountants need to take a proactive role in sales tax compliance. Fortunately, with the adoption of a STMS service, compliance can be quick, affordable and easy - no joke.
Wayne Harding, CPA, has marketed and consulted in the accounting technology field for the past 20 years. Reach him at firstname.lastname@example.org. Richard Oppenheim, CPA, CITP, has written about technology for over four decades, and currently provides advice through the Oppenheim Group. Reach him at email@example.com.
* CCH Sales Tax Solutions
* Tax Partners
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