Sales and Use Tax Best Practices
This past summer, the Supreme Court abandoned over 50 years of settled law when it decided the Wayfair case. Essentially the court’s ruling in South Dakota v. Wayfair (No. 17-494, June 21, 2018) means that online retailers will now be required to collect sales tax from customers in individual states, even if they do not have a physical presence in those states.
Since most of the largest online sellers like Amazon and eBay are already collecting sales taxes, the impact will be felt primarily by smaller unsuspecting businesses that make sales in states where they are not physically present or collecting sales tax, including many of Amazon’s third party sellers and sellers based outside the U.S.
So what should a business do to make sure it’s in compliance with sales and use tax rules? Here are some best practices:
To understand the Wayfair decision, it’s important to remember that sales tax nexus determines when a taxpayer has to file tax returns in a state based on the activities conducted in the state. Prior to this SCOTUS ruling, nexus was based solely on physical presence. Now it can be based on economic activity as well. Companies that do not register and collect sales tax in the proper jurisdictions can incur substantial penalties and interest. Therefore, it’s important to determine where your company has nexus under the new sales and use tax landscape.
Analyze taxability of products and services
Determine which of your products and services are subject to sales tax in the various jurisdictions where your company has nexus. You must also ensure those products and services are accurately mapped to the proper tax code within your software system. Inaccurate sales tax mapping can lead to significant liability upon audit.
Monitor sales and use tax law and rate changes
Unfortunately, determining nexus and taxability of products and services is not a one-time endeavor. Nexus must be monitored on an ongoing basis because it is constantly changing, and the business activities that can trigger nexus can vary from state to state. Taxability of products and services should also be reviewed regularly due to state and local sales and use tax law and rate changes.
Rate changes should be updated in your company’s sales tax software on a periodic basis, preferably monthly. Overlooking a rate change and charging incorrect sales tax can lead to under collection of sales tax.
Understand and determine use tax liability
Review all invoices for purchases made by the company that are not for resale and determine whether use tax should be accrued and remitted to the jurisdictions where you have nexus and filing requirements. It’s a good idea to develop a written use tax policy and procedure and provide training to those who make the decision of whether to accrue use tax.
Develop an exemption certificate management process
Invalid and expired exemption certificates can put a company at risk for potential liability upon audit. Verify the validity of your exemption and resale certificates and ensure they are fully and accurately completed and executed. Then, be sure to keep them on file so they are readily available for audit. Going forward, establish a tracking procedure to ensure all certificates stay current.
Develop thorough audit processes and procedures
The data you submit to an auditor should be transparent, not only to earn the auditor’s trust but to reduce the possibility of future audits. Create and maintain a database of audit history to track both the amount of assessments as well as the audit risk exposure found. Create a policy and procedure to take corrective action to fix issues and problems uncovered on audit as soon as possible which will reduce the time spent on future audits as well as liabilities on audit.
For a quick summary of these best practices, download our sales and use tax best practices PDF here.
Developing strategies to avoid the inevitable pitfalls that come with this historic change in sales and use tax law is a necessity. The experienced tax professionals at True Partners Consulting can help by working closely with you to: analyze your current business operations; identify states in which you have nexus; determine past, present, and future filing requirements; and implement software solutions for compliance responsibilities. To learn more about sales and use tax contact Don Bast, Donald.Bast@TPCtax.com.