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 don’t 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. Unfortunately, due to the complicated nature of sales tax issues – especially now that the recent Wayfair case has complicated state-to-state commerce even more, the results could be costly for your business.
Can’t My CPA Firm Handle Sales Tax Too?
Although many businesses hire an outside CPA firm to assist with tax returns, these firms often don’t have the skill set to deal with sales tax matters beyond filing in-state returns. We find that many smaller CPA firms don’t specialize in sales tax consulting, which includes nexus (both physical presence and economic nexus), taxability of a company’s products (which may include digital goods), potential exposure analysis and more.
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, particularly as the states are also becoming more aggressive.
Can Sales Tax Really be That Complicated?
With more than 5,000 taxing jurisdictions in the United States, there are numerous 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 another state
- Inventory being stored in another state
- Working with independent contractors located in a different state
- Online sales across state lines (more on this below)
As businesses expand, and as state tax laws change, it’s important they realize where exactly they have nexus.
We suggest you use a funnel approach:
- Collect all the pertinent facts
- Ask targeted questions to determine where some of the “skeletons” might be hiding and how to mitigate those areas
- Assess exposure for our clients
For example, as we work with clients, we work to determine nexus – both for physical presence purposes (where the company has employees and contractors, equipment and inventory), and economic nexus (where they have significant sales activity). We also consider what they sell and the taxability of their products or 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
An example of how important it is to be aware of nexus in regards to sales tax issues is 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 that client didn’t realize was that those activities gave them nexus. They should have been collecting and remitting sales tax on each product sold, but they hadn’t been Imagine the potential liability over a three to four years period!
The good news is we were able to work with the client and provide 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 have figured it all out, it would have taken them extensive time and energy, splitting their focus from where they actually thrive.
How Wayfair Complicated Sales Tax
Sales tax issues were complicated before, but after the Supreme Court’s ruling in the Wayfair case(in June 2018), online sales tax became a focus for state departments of revenue and so called “economic nexus” legislation in almost all states expanded the ways in which companies could establish nexus, thereby making it easier for companies to have to register, collect and remit tax, and file sales tax returns. Within a year of the ruling, almost all states have created thresholds for:
- The amount of sales (in terms of dollars) a company can make before they establish nexus
- The number of transactions a company can complete within a state before they establish nexus
This is a specific area of sales tax that’s difficult for busy corporate controllers to stay on top of. In one year alone, more than 35 states quickly passed economic nexus laws, after which some then went back and changed the thresholds. Others turned around and added in provisions that made marketplace facilitators like Amazon and eBay responsible for collecting the sales tax on transactions (rather than the individual sellers).
Sales Tax Issues Related to Digital Goods
Keeping up on online sales tax is complicated enough, but it’s not the only way sales tax has become more confusing lately. The taxability of digital goods becomes a big question that individual states handle in different ways, which can be another challenge for corporate controllers to wade through.
For example, say you have a SaaS company with customers all over the country. Because it’s a service, it’s not taxable, right? Well, it depends on the state you talk to. The truth is that more than 50% of states do in fact impose sales tax on software that’s prewritten and delivered electronically. Additionally, more than 20 states impose sales tax just for providing access to prewritten software, which falls under the SaaS model. Your corporate controller would need to be familiar enough with each state’s tax code to determine taxability and economic nexus, as well as how much of each transaction to collect and remit to each state.
Next Steps For Your Business
Does your corporate controller need help figuring out how sales tax issues affect your business?
Call us for a complimentary consultation, so we can answer your questions and give your company peace of mind.
Have a question? Contact Monika Miles.