If your company is set up like most, the sales tax burden probably becomes yet another area piled onto the already busy plate of the corporate controller—this is especially true at small and middle market businesses. These organizations often do not have a tax department that includes sales tax, so all accounting-related matters fall to the controller. He or she is usually a financial accounting person and probably doesn’t enjoy dealing with tax anyway, but now they are stuck with trying to figure out the complications of sales tax.

What About A Company That Hires A CPA Firm?

 

Although many businesses hire an outside CPA firm to assist with tax returns, these firms often do not have the skill set to deal with sales tax matters beyond filing in-state returns. We find that many smaller CPA firms do not specialize in sales tax consulting, which includes nexus, taxability across state lines, potential exposure analysis, etc. That said, the controller may think that the accounting firm has it taken care of (and vice versa). This is a dangerous position for the company.

Can Sales Tax Really Be That Complicated?

 

With more than 5,000 taxing jurisdictions in the United States, there are a lot of ways organizations can trip into multi-state tax issues.

As companies expand they generally create nexus, or taxable presence, in multiple states. Things that create nexus include employees working in a state, inventory in a state and independent contractors. As businesses expand – and as state tax laws change – it’s important they realize where exactly they have nexus.

At Miles Consulting Group, we do this with a funnel approach: we collect all the pertinent facts and ask targeted questions to find out everything we need to know to narrow in on and ultimately assess exposure for our clients. For example, as we determine nexus, we ask where the company has employees and contractors, equipment and inventory. We also consider what they sell and the taxability of their products and services in the various states to determine if they might be eligible for any exemptions. Once we have identified where they are taxable and what is taxable, we work with the client to calculate the potential exposure and lay out options for remediation.

Case Study: Sales Tax Issues

 

As an example of how important it is to be aware of nexus in regards to sales tax issues, we recently had a client headquartered in California that sold specialty equipment across the entire United States. They had sales people going out to various locations, and then third party contractors that did the installation and training.

What they didn’t realize was that those activities gave them nexus, and they should have been collecting and remitting sales tax on each product sold. You can imagine how big of a problem this could be after 3-4 years of doing this incorrectly!

The good news is we were able to go in, get an analysis of the situation and correct their filing practices. We were also able to reduce the penalties and interest before the states came in and audited them. Although a corporate controller probably could figure all of this out, it would take them extensive time and energy, splitting their focus from where they actually thrive.