Mitigating Sales and Use Tax (“SUT”) Risk
Sales and Use Taxes (SUT) have been in the news recently due to the Wayfair decision and many states have enacted economic nexus statutes as a result. The Supreme Court made a historic change in the SUT landscape in 2018 when it abandoned the long held physical presence standard regarding sales tax nexus; companies can now be required to collect and remit sales tax simply by making sales into a state that they never go into or have a location in. In addition, states have become increasingly aggressive in enforcing their SUT laws. Now, more than ever, it is important for a company to have a good understanding of its SUT footprint in order to mitigate the risk of audit, penalties and interest from over 20,000 taxing authorities in the U.S.
As states continue to change how they tax different revenue streams, it’s imperative that the SUT function be involved from the beginning stages of operational and financial decisions. Companies can significantly reduce their overall tax risk by encouraging accounting, finance, tax, accounts payable and other business decision departments to collaborate. SUT risk is not solely a tax or finance issue but rather a business issue that can have a significant impact on the company’s overall financial position.
Is Your Sales and Use Tax Function Effective?
With the ever-changing SUT laws and states constantly trying to broaden their reach of sales and use tax revenue, it is important that tax work efficiently and effectively with other departments. Particularly, when it comes to sharing information and understanding business trends and strategies. This can raise a number of questions regarding the effectiveness of the SUT function:
- Does the SUT function participate in strategic business decisions?
- Does the SUT function’s risk strategy align with the overall company’s?
- Is the SUT function communicating proactively with all functions in order to keep abreast of business changes and provide important updates?
- Does the SUT function actively engage with C-Suite and key internal stakeholders to evaluate and determine risk?
If you answered no to many of the questions above, you may want to consider a strategic review of the SUT function’s role in the company.
Indicators of an Ineffective Sales and Use Tax Function
Below are some risk factors that indicate process improvements may be necessary:
- The SUT function acts in isolation with poor connectivity to senior management and crucial business processes, leading to the hindrance of data exchange.
- Frequent underpayment or overpayment of sales and use tax.
- Sales tax compliance deficiencies, which require increased SUT reserves resulting in increased financial statement risk.
- The company has gained a reputation with taxing jurisdictions of not correctly reporting their SUT liability and failing to pay its fair share of taxes.
- Increased number and frequency of SUT audits as well as significant audit adjustments.
- Utilizing manual or outdated processes rather than relying on automated software.
Building a More Effective Sales and Use Tax Function
An effective SUT function will include a strategy to improve the management of people, processes, data and technology and should include the following:
- Evaluate current processes annually to assess areas of risk.
- Institute SUT best practices and ensure they align with business strategy and operations.
- Implementation and review of policies and procedures to ensure they are followed.
- Deploy technology to support and strengthen the SUT function.
- Engage and collaborate with Finance, IT, the C-Suite and other key stakeholders in order to encourage data and information exchange.
True Partners’ Sales and Use tax experts can help you reduce risk. Contact Donald Bast, Managing Director at (312) 235-3301 or Donald.Bast@TPCtax.com.