There are sales tax software companies out there (some of whom are our strategic partners, so this is where this fine line we walk gets a little curvy) who will tell companies how easy it is to “bolt on” their solution to billing or CRM systems. With the flip of a switch, sales tax compliance can be done monthly…if only the company knows where it has created nexus, knows exactly how to code its products, and has properly contemplated the ramifications of dealing with retroactive liability and also, possibly, income tax. We built a lot into that last sentence. Here’s why – it is never as easy as flipping a switch. We all know that, and yet, we realize how tempting it is for companies out there to want to jump to the “easy” software solution.
In this blog, we want to share some very common questions we get from clients and prospective clients, and share why the “people element” is still a necessary (and vital) element in the sales tax compliance equation. Let’s start with a few basic requests that we frequently encounter.
Can You Help us with Sales Tax Registrations in Multiple States?
Of course we can! But let’s ask a few questions first.
Do you have nexus? Nexus can be of the physical presence type (employees or independent contractors, an office, or inventory within the state), or economic nexus (a certain threshold amount of sales – often referred to as Wayfair nexus in honor of the 2018 US Supreme Court case).If so, when did you create it?
Many of the sales tax compliance software companies don’t talk much about retroactive exposure. Their sales people are focused on signing clients up for future software sales. We know, that sounds a bit cynical. But, we’ve had many conversations with clients who buy the software without really considering their potential retroactive exposure (more on that below).
If you have created nexus some time ago (2020, 2021), are you prepared to deal with paying any tax which may have been due from those time periods?
Have you considered voluntary disclosure agreements (see below)?
Have you reached out to any customers to determine if they may have self-remitted the tax already, OR can you go back to customers to collect that back tax that you may not have collected? (Oh what a Pandora’s Box!)
Have you considered the income tax ramifications of registering for sales tax? If you’ve created physical presence (and in some cases economic nexus), you might also have an income tax liability and filing requirement. S Corporations and LLCs have particular challenges with multistate filings because of their flow-through nature. Oftentimes, sales tax compliance software companies only consider the sales tax ramifications. We’ve seen clients be in difficult situations as a result.
In summary, with regard to registrations, our software colleagues may not always ask these questions. We do. It makes the overall compliance process much smoother to ask those questions up front.
Do We Need a VDAs?
Well, it depends. First let’s define what it is. A voluntary disclosure agreement (VDA) is essentially a legal contract between the state and the taxpayer, where both parties agree to certain stipulations as a premise of the taxpayer coming forward to pay retroactive taxes that are due, so that they can ultimately register in the state and begin to file prospectively. Generally, the state agrees to a limited lookback period (3-4 years) and will waive penalties. The taxpayer agrees (under penalty of perjury) to properly report and pay the taxes owed for those agreed upon periods.
There are multiple steps in the VDA process. Generally a taxpayer can remain anonymous for a period of time (and there are advantages to that), so it behooves a company to hire a third party to assist with the process. Also, companies like Miles Consulting have many years of experience in filing VDAs with various jurisdictions. Like so many things that we do with clients across the states – the process varies from state to state, and we know the nuances.
As with the registrations above, there are questions that we believe should be considered when contemplating going with VDA route.
Should we just automatically do a VDA in all states?
In our practice, we review all the facts of a client’s situation state by state, and if there is retroactive exposure, VDAs are certainly an option that we often recommend. But not all states are created equal, and not all situations are created equal. We take into account the amount of exposure, the level of retroactive documentation that a client may have (for instance with respect to exemptions, resales, etc.), whether or not a client’s customer may have self-assessed tax, and other items. These all play a part in our recommendation to file for a VDA or not. In our experience, oftentimes the software companies will push clients to file VDAs in many states before asking important questions, which can lead to over-selling modules and creating burden for the client.
What about income tax?
We have found that many software companies don’t ask the income tax questions. While companies are often eager to take care of the sales tax matters, we never recommend to handle them without considering all the ramifications. As such, we look at a client’s whole picture – not just sales tax – when recommending VDAs.
Should we go through the Multistate Tax Commission (MTC)?
The MTC is a coalition made up of state Departments of Revenue personnel (with input from the taxpayer community) that offers a VDA program under which taxpayers can file multiple VDAs in one place. In short, we rarely, if ever, recommend this approach, as it takes it out of the hands of our client and into an area where they relinquish a fair amount of control.
Should we go through the Streamlined Sales Tax (SST)? – See above re: MTC…for all the same reasons!
What about simply registering and back-filing needed returns?
This is a very viable option for clients in states where estimated retroactive exposure is not as material. Under this scenario, a client might have either a shorter exposure window (say 18 months or less) or a smaller amount of exposure. While a state may not necessarily statutorily waive penalties under this approach, it may be more cost effective overall to take this approach. At Miles Consulting, we generally work with our clients on a combination of VDAs and registration and back-filing. Again, we help our clients to analyze the best course of action in each state. It’s not a cookie-cutter approach.
Sales Tax Compliance – What are the Options?
Obviously, gone are the days when people put pencil to paper, prepare a return and send it in! Right? Certainly, for the most part. There are still situations (for companies who have few filings and no multi-state exposure) where a company might essentially manually fill out a return on-line and monthly or quarterly file that way. But most of our clients are multi-state taxpayers and file in many states. As such, they really do need a software solution of some kind. And there are many good sales tax software providers out there. These companies have various modules that customers can purchase – often within a bundle – and pricing tends to be very aggressive. This is where the road we travel often becomes difficult to navigate. We KNOW there are good software and SaaS solutions out there. In fact, we, of course, also use software to assist our clients with compliance. However, it is our contention that the right solution is the one which incorporates both software and the human element of consulting. For all the reasons we’ve mentioned above, AND as it relates to the implementation of a sales tax software model, it’s just not as simple as buying a software solution. There are many things to consider, and it truly must include the human element.
Is it Plug & Play?
No. One of the biggest concerns for clients is that they really want to become compliant for sales tax – and soon. And in the process of trying to become complaint they often unwittingly purchase all the modules offered without really knowing the ramifications. This is because software companies aggressively price the bundled solution – but not everyone needs it all. Most important, a company must deal with retroactive exposure before registering and moving forward.
As part of the software integration process (so that that sales tax software can talk to the client’s ERP or billing system), the company will need to code its revenue products to talk to the software. Once this coding occurs, the sales tax software will then return, by state, the correct taxability of a particular product (like SaaS, hardware, or professional services, for example). However, the software providers don’t always share that up front. Customers buy the software, thinking it’s a one-stop solution only to find that they need to properly code their revenue items. Bottom line – we help with that. The software companies generally do not. Human element!
Unusual Products (for example – digital goods, mixed services, SaaS)
What about properly coding a product that might have mixed use elements or not be clearly defined in the software company’s coding? We work with clients to really understand their revenue streams and help to perform proper coding – so that the correct amount of tax is charged on the front end. That is, the client collects and remits the correct amount from its customer. We often consult with clients on bundled items which might include some taxable components and some non-taxable components.
This is a common area of concern for many companies. We help with that. Software companies? Not so much.
Software vs. Humans
As we prefaced at the beginning of the blog article, we truly do believe that a software solution for sales tax compliance is the right answer. However, we also believe that clients are better served when their implementation team includes the right mix of state tax consultants, software, and integration experts. Unfortunately, we sometimes find that the software companies try to be the “one stop shop” for those services. But, when the ultimate goal is to sell software, we believe there’s often a conflict to push companies to buy as much software as possible up front, when many times, the answer is more human interaction to analyze the best mix of consulting and software.
At Miles Consulting Group, we love software companies. They make up a significant part of our client base (both on-premise software and SaaS companies), our vendor base (of course we license it!), and even strategic partners. And yet, we recognize that sometimes, you just need a person to talk to. On the sales tax compliance side, that’s where we come in. As the humans in the equation, we invite you to have a conversation with us to determine how we might help you evaluate your potential sales tax compliance situation. Contact us at info@milesconsultinggroup or 408-266-2259 to schedule your complimentary consultation.
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