sales tax survival guide 2013

7/30/2019 Sales Tax Survival Guide 2013

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SALES TAX

SURVIVAL GUIDE2013


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Until recently, sales tax received little media attention outside o the

tax and compliance arena. Then large states like Caliornia and Texas

enacted laws requiring online retailers such as Amazon to collect sales

tax or the frst time. Soon other states ollowed suit. A similar shake-up

at the ederal level is pending: The Marketplace Fairness Act o 2013 gives

states permission to require sales tax collection rom all remote sellers, i

the states can streamline their sales tax processes.

Considering the already impenetrable maze o sales tax collection rules,

businesses ace an uphill battle this year. Sales tax compliance in 2013

requires more resources and expertise than most small to midsized

businesses possess.

This Sales Tax Survival Guide will help you:

Understand the challenges and risks associated with managing

sales tax compliance.

Develop strategies to help you survive sales tax challenges.

Know which state and ederal sales tax changes will impact your

bottom line.

SALES TAX

SURVIVAL GUIDE


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1. Sales taxSales tax is a tax charged at the point o purchase orcertain goods and services. The tax amount is usuallycalculated by applying a percentage rate to the taxableprice o a sale. A portion o the sale may be exemptrom the calculation o tax because sales tax lawsusually contain a list o exemptions. The seller collectsmost sales taxes rom the buyer and remits the tax to agovernment agency.

2. Use taxUse tax is a tax imposed on a consumer or the storage,use, or consumption o tangible personal property(TPP) when sales tax was not paid on the original sale.Use tax is the complementary tax to sales tax and istypically assessed at the same rate as any sales taxthat would have been owed. Purchases made over theInternet and out-o-state are the most common typeso transactions subject to use tax. Use tax must also bepaid when a business withdraws goods rom inventoryor its own use, i sales tax was not paid on those items

at the time o purchase.

Unortunately, this is only the beginning o the salestax survival challenge in 2013. Current state and ederalproposals to change remote sales tax collectionrequirements add to an already difcult complianceenvironment or businesses.

SALES TAX CHALLENGES

So what exactly is sales tax?


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It doesnt take a policy expert to gather rom headlinesthat states are actively crating laws requiring onlineretailers to collect sales tax. What many businessesdont realize, however, is that remote sellers such asdistributors, manuacturers, and multi-level marketersmight also be impacted.

Amazon Laws and newrequirements for remote sellers

Amazon Tax or Amazon Laws describe state lawsenacted to compel online retailers to collect sales tax,under certain conditions. The states with Amazon Lawsin place are highlighted in yellow in the ollowinggraphic.

Calling these laws Amazon laws is misleading sincethey apply to all remote sellersdefned as a businesseswithout signifcant physical presence in another stateand that sells to customers using the Internet, mailorder, or telephone.

Cities, counties and states regularly change these rules,making sales tax compliance nearly impossible or mostbusinesses. These changes oten include:

Product and service tax exemptions.

Sales tax holidays.

Boundary adjustments.

Rate increases or decreases.

Managing these changes is made more difcult by thestate and ederal changes detailed below.

Federal proposals would change sales

tax collection and enforcementMany online retailers and other remote sellers do notcurrently have to collect sales tax in states where theyhave no physical presence. States struggling to recoverrom economic recession see this uncollected tax as amajor source o revenue.

A well-known University o Tennessee study estimatesthat in 2012 state and local governments would lose$11.4 billion in potential sales and use tax revenue rome-commerce. . That number jumps to $23 billion whencatalog, phone and all other untaxed transactions areincluded. Furthermore, brick-and-mortar retailers arguethat their online counterparts enjoy an unair priceadvantage when they dont have to collect sales tax.

The Marketplace Fairness Act o 2013 grants statesthe authority to compel out-o-state online sellers tocollect sales tax at the time o a transaction, just as

WHY STATE AND FEDERALCHANGES WILL IMPACT YOUR

BOTTOM LINE THIS YEAR

}States that have Amazon laws


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local retailers are required to do. Under the proposedlegislation, out-o-state sellers that make more than$1 million in gross receipts annually would collectsales tax in states as long as the states simpliy theprocess, though this threshold is likely change i the billbecomes law.

On average, sales tax compliance costs small and mid-sized businesses three to 15 cents per sales tax dollar

collected. According to the U.S. Census Bureau, ailure toaccount or that expense is one o the principal causeso small and mid-sized business ailure in the UnitedStates. Why? The components o this complianceexpense are difcult to pinpoint and oten overlooked.The costs are hidden in stafng, compliance, accountingsystems, inormation technology, and other businessinrastructure.

In addition, sales tax compliance is a pass-throughactivity that adds no value to the bottom line. Salestax collection requires your business to act as an agent

o each state in which you have nexus and collectand remit sales tax accordingly. And i you dont do itcorrectly, accurately and on time, your business can aceheavy fnes and penalties.

The ollowing survival tips can help you meet some othese challenges in 2013.


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SALES TAX SURVIVAL TIPS

Does sales tax compliance apply to your business?That depends upon a set o regulations known asnexus rules. According to a series o Supreme Courtdecisions that culminated in Quill v. North Dakota, anout-o-state business must collect sales tax on behalo the state, i it has a substantial physical presencein that state. Unortunately, the Court did not defnesubstantial physical presence, so each state hasestablished its own set o regulations. Examples onexus-creating activities include: holding a businesslicense, owning tangible property or establishing aheadquarters in a given state. By doing these things, abusiness agrees to be an agent o that state to collectsales tax and remit the unds back to the government.

Many states are addressing budget gaps by increasingproduct and service taxability. Your business mustdetermine which items require tax, and capturevariations arising rom the location o the sale.

While most states dont collect sales tax on groceryitems, many do tax processed oods that containcertain ingredients. Service taxability varies greatlyrom state to state. States like Delaware, Hawaii andWashington tax a large number o services; otherstates such as Alaska, Virginia, and New Hampshire

tax very ew. As taxing jurisdictions change their rulesabout taxability o goods and services, your business isrequired to adjust your accounting systems accordingly.

1 2Determine which jurisdictionscan apply sales tax on yourbusiness

Establish which productsand services are taxable


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Dont make assumptions about geography. Manybusinesses make the mistake o searching or thecorrect tax rate by ZIP code, assuming this will givethem accurate inormation. Unortunately, taxing

jurisdictions do not ollow ZIP codes. Geospatialmapping, on the other hand, can pinpoint eachlocation against a specifc taxing jurisdiction.

Not all customers must pay sales tax. Depending onthe rules in your taxing jurisdiction, certain businessesand individuals are exempt rom sales tax. It isincumbent on the vendor to collect and keep on fle avalid exemption certifcate.

You must ensure that exemption certifcates are validor each sales transaction. This requires your businessto keep a copy o each exemption certifcate. For easieraccounting, a database or spreadsheet o exemptioncertifcates should be easily accessible. The bestsolutions tie directly into your point-o-sale system,making it simple to veriy that exemption certifcatesare current, valid and on fle.

3

4

Apply the correct tax ratefor the jurisdiction

Collect the appropriate salestax exemption certificates fromcustomers

(continued)SALES TAX SURVIVAL TIPS

For each taxing jurisdiction, a business must meetfling deadlines and provide timely remittance usingcorrect orms and ormats.

This step sounds simple. And or many businesses itmay be easy, especially those with only one location.In this case, the business would be responsible orcollecting sales tax at the rate applied in its home city.Things grow more complex when the business adds alocation. And then another. With each new city or state,there are a host o new guidelines addressing fling and

remitting.

5Remit sales tax to thecontrollers office according tostatutory deadlines


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Why its important to remitsales tax correctly

Some businesses mistakenly believe that i they dontmake major mistakes they will not be audited. That isincorrect. Audits are oten prompted by external causes,such as revenue shortalls or changing tax rules.

States are becoming increasingly aggressive inauditing businesses. Most states use a ormula todetermine which businesses will be audited. Thestate examines the results o past audits to see whichindustries, business sizes and types had the mostcompliance issues.

Other triggers include Internet-only businesses, as wellas those selling clothing, ood, sotware, electronics anddigital media. Here are a ew actions that can causegreater compliance scrutiny:

1. Nexus Nexus triggers include: having out-o-daterates and rules, ailing to recognize new rules thatcreate remote seller nexus, or using error-pronemanual processes to manage complex sales anduse tax laws and rates.

2. Exemption / reseller certifcates Exemptioncertifcate-related practices that might increaseyour risk o an audit: inability to quickly generatea summary report, inaccurate, incomplete andmissing certifcates, or expired certifcates.

3. Filing and remittance Filing errors that mightincrease your risk o an audit include ailure toprepay where required, late payment, or paymentto incorrect jurisdictions.

4. Product and service taxability Remember toupdate product and service taxability as ruleschange and new products and services are oered.

An auditor reviews a sample o 20 transactionsin which no sales tax was collected. Exemptioncertifcates or our o those transactions arenot on fle and immediately available. Theauditor can extrapolate the results o thatsample and claim that 20 percent o yourcompanys non-sales-tax transactions areinvalid. Those taxes would then be assessed, aswell as penalties and interest.

EXAMPLE

PREPARATION &PROTECTION OF ASSETS


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To survive an audit, the most critical action a companycan take is to collect sales tax properly over time. Butollowing every rule will not help your business unlessyou have properly documented every step o the way.Audits are much less painul when good documentation,such as transaction histories, exemption certifcates andother details are at your fngertips.

To eectively comply with sales tax regulations, youwill need cooperation rom several areas within yourbusiness:

Accounting tracks and applies sales tax statutorychanges across every jurisdiction where your com-pany does business, as well as create and maintaindetailed records o sales tax compliance activities.

Sales helps determine whether new locations oraccounts will bring associated sales tax compli-ance issues.

IT makes changes to accounting systems ande-commerce systems, plus allocate adequate elec-tronic storage or compliance records.

Unortunately, addressing sales tax compliancemanually is inefcient, error-prone, and detracts romrevenue-generating activities. Well-run businessesunderstand that a sales tax strategy is not simplyabout accuracy, especially given that 100 percentaccuracy in sales tax collections and remittances isnext to impossible.

While accuracy is obviously important, efciency isparamount. There must be a balance between the two.Imagine a company that runs a chain o donut shops.The team members at that company want to delightcustomers with tasty donuts and make a proft doing it.They dont want to become experts on the taxability odonuts in each state.

So how can a business make the sales taxcompliance process more efcient, while alsominimizing the risks inherent in compliance?

Automation and outsourcing.

COMPLIANCE RISKS& HOW TO NAVIGATE THEM


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Given that manual sales tax compliance tasks donot generate revenue and drain scarce resources,and that inaccurate management has severe results,automating and outsourcing the process makes sense.Rather than create policies, procedures and recordsrom scratch, thousands o companies choose to ullyoutsource their sales tax compliance program. Fullyautomated solutions are available both on-premiseand hosted (in the cloud).

The most efcient way to automate is by choosing thehosted model, where a sales tax compliance vendorintegrates into existing accounting, point-o-sale, ERP,and other technology systems. In addition, the vendortracks your companys data as needed, includingexemption certifcates, sales tax liability data andmore. With a ully hosted solution, its simple or yourteam members to get immediate access to critical dataany time or anywhere.

In addition, outsourcing the sales tax complianceunction shits your companys risk to a third party. Forexample, the Streamlined Sales Tax Project certifesAvalara. As a result, Avalara clients are protected rompenalties and interest i any mistakes in sales taxremittances occur.

To avoid liability in an audit, your business mustdemonstrate that great eorts were made to comply

with sales tax regulations. At a time when businessesare trying to do more with less, utilizing sta timeto stay compliant with multi-jurisdictional sales taxcollection requirements is a poor use o resources.

A better strategy is to automate and outsource thesales tax collection and remittance process. Evensmall organizations can shit their risk to a thirdparty and remove the negative impact to sales andresources, while also streamlining the entire sales taxmanagement process.

No system is absolutely oolproo, but with a detailedprocess in place, an auditor is more likely to give yourcompany a clean bill o health.

AUTOMATIONIS THE KEY TO SURVIVAL


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WHAT CUSTOMERS ARE SAYING

I was managing all the sales tax

rates and it was a lot o work. It was

also very difcult to get the reports

that we needed to fle the sales tax

returns. Thats when we decided we

should automate and look or a

sales tax solution. We didnt want to

have a server in-house to support.

One o the other sales tax solutions

we were looking at was also a lot

more expensive. AvaTax just seemed

more cost-effective and we liked

the idea that it was hosted.

~ Danielle Jaworski,

Controller at Breitling USA

Our biggest audit hit was the

exemption certifcates and the no-

tax sales. So we decided to go with

AvaTax Certs. We really eel strongly

that it is going to be a good tool for

us to help with audits, to reduce

our liability with states, to reduce

the frequency of state and multiple

jurisdiction audits. We needed to

outsource part o our sales tax to

make sure we were compliant.

Avalara had what we were looking

or. Everything ft.

~ Heather Gravelle,

Sales Tax Manager at Furniture Row

From a compliance standpoint, taking most o the responsibility o

your shoulders and putting it onto a company whose on-demand

calculation is pretty accurate, I would defnitely recommend it. We

used to have one staff accountant who was doing every single

return and it was just way too time-consuming. At the time, we only

had seven states. Now, were up to 25, so were really glad we went

with AvaTax Returns.

~ Anthony Carter,

ERP Analyst at ESET North America


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Understanding the implications o recent state and ederal rulechanges and addressing the onerous task o complying with theongoing jurisdictional statutory changes need not expose yourcompany to audit risk. You can address this today.

About Avalara

Founded in 2004, Avalara pioneered a service-based platorm or

sales tax and compliance automation and has been recognizedor years as one o Americas astest growing technology frms.The companys cloud solutions help thousands o customers stayocused on their core businesses by providing automated end toend compliance services including sales and use tax calculation,exemption certifcate management, fling and remittance, and abroad array o related services.

1. Contact Avalara or a custom analysis o your

potential sales tax collection requirements in all othe jurisdictions in which you currently operate or

into which you plan to expand.

2. Take the next step toward automating your sales

tax process.

CALL: 877-780-4848

VISIT: www.avalara.com/products/avatax

www.avalara.com

HERES WHATYOU CAN DO


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Real-time access to the most

current rates and taxabilityrules within any ERP or billingsystem. AvaTax dynamicallydelivers 100,000+ taxability rulesand applies them across 11,000+

jurisdictions at the point otransaction, within any ERP orbilling system.

Limit your non-taxed transaction

audit liability. Ensure that validcertifcates are immediatelyaccessible through electroniccollection, storage andmanagement.

Ensure timely and accurate

transactional tax fling andremittance - with simplicity. Filereturns and remit payments ontime using a single paymentsolution. Whether the jurisdictionrequires e-fling or mailed inhard-copy returns, Returnsperorms the job.

COLLECTION WIZARD RETURNPREPARATION

STORAGE & RETRIEVAL FILING & REMITTANCE

TAX DECISIONSOFTWARE INTEGRATION

RETURN ARCHIVE

RENEWAL

MANAGEMENT

NOTICE

MANAGEMENT

CERTIFICATE REQUEST LIABILITY WORKSHEET

JURISDICTION

ASSIGNMENT

PRODUCT TAXABILITY

SOURCING RULES

REPORTING

ADDRESS VALIDATION

Fast. Easy. Accurate. Affordable.End-to-end sales tax compliance solution.

sales tax survival guide 2013

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