State & Local Tax Blog

Are Your Business Clients Sales Tax Compliant? 3 Questions to Ask

Here’s a shocking stat: It’s estimated that 98% of small businesses are failing to comply with their state sales tax responsibility. Here’s how accountants, bookkeepers and CPAs can help them.

Even though everyone knows state sales tax compliance is a requirement, 71% of CPAs and accountants fall short of keeping their clients compliant. Why?

It’s been over three years since the Wayfair vs. South Dakota Supreme Court decision changed the landscape of sales and use tax. Even after all this time, state sales tax compliance is still full of nuance and mystery.

Because of all these complexities, there’s a great burden of knowledge that’s been placed on accountants, CPAs and bookkeepers. It’s a lot to know, and it’s hard to stay up to date while doing all the other functions of your job.

That’s why we put together this quick guide. It’s designed to get accountants, bookkeepers and CPAs on the right track with getting their business clients fully compliant.

3 Sales Tax Questions CPAs Need to Ask Their Clients

Getting your clients compliant with every state sales tax law is a complex task, but these three questions will give you a better picture of your client’s tax liability.

#1. Does my client have nexus?

This is a great place to start to determine if a business has sales tax responsibility in any states.

It’s important to understand the different ways that a business can establish nexus:

  • Physical Nexus – location, employees, contractors and inventory. Basically, any physical presence that your client’s company has in a state.
  • Economic Nexus – revenue and transactional thresholds set by the various states. If your client meets these thresholds by doing business in the state physically or online, they have sales tax responsibility.

This may seem like a simple step to cover, but it can be tricky when dealing with a business that hires contractors, offers onsite training/service, and/or sells online. You need to make sure that you have knowledge of where and how your client is doing business.

#2. Is what they sell taxable?

In addition to determining where a business has nexus, you also need to know the taxability of their products or services.

Taxability laws vary from state to state. Every state that has sales tax has different categories that may be exempt from that sales tax. This is important information to avoid under or over-collecting sales tax from customers.

It’s also beneficial to ensure that businesses aren’t unnecessarily paying sales tax on purchases.

#3. How do they sell their products and services?

This is key in determining your client’s tax responsibility. If they sell through their own channels, then they probably have responsibility for collecting and remitting state sales tax where they have nexus.

If they sell through a marketplace facilitator, then it’s likely that the marketplace is collecting tax on all transactions. All of the major marketplaces are collecting the tax according to the Marketplace Facilitator Laws in the states. If your client sells on smaller marketplaces, it’s prudent to verify that they are collecting the tax.

If your client is selling to other businesses (distributors, resellers, manufacturers, etc.), it’s likely that they will need to collect and maintain certificates (exemption/resale) in lieu of collecting tax on the transactions.

These are just the basic questions that you need to be asking about your clients. When you have this information, you’re well on your way to resolving any state sales and use tax issues.

Should You Ask for Help with State Sales Tax Compliance?

We understand how this goes. You’re seen as the expert and the trusted advisor by your clients. But because of how complex state sales tax is, you can’t possibly be an expert on all the ins and outs of sales tax compliance across 45 states plus DC.

So that puts you in an uncomfortable situation. Being the resident expert, it’s hard to imagine seeking outside help. But part of being a good advisor and consultant is knowing when to ask for help.

As we like to say here: the questions are the answers. Your clients may not even know the right questions to be asking. So, when you go to a sales tax expert and you ask the right questions, you’ll gain more knowledge, and your clients will benefit.

By any means necessary, you should strive to be a part of the 29% of accountants, bookkeepers and CPAs that actually keep their clients compliant. Because for companies that are out of compliance, an unexpected audit could be devastating.

Sales tax can be a margin killer. If your client should be collecting tax and they don’t, the state can come back and demand that tax plus penalty and interest. That can be anywhere from 10-25% annually of your sales that are taxable. If your client has low profitability on their transactions, their margin could get completely wiped out by non-compliance. If it goes on too long, it could kill the business. And it will kill your relationship with that client.

Conclusion

The problem sounds dire, but the answer—and the solution—is out there. Sales and use tax liability is a challenging subject, one that requires an expert to get completely right. By answering these three questions about your clients, you’ll be well on your way to ensuring their businesses are fully compliant.

But it really helps to talk to an expert. Look at it as a learning opportunity. Your skills and expertise will grow from talking with a sales tax specialist. You and your clients will find peace of mind knowing that they’re fully compliant.

Are you an accountant, bookkeeper or CPA looking to get your clients sales tax compliant? We’re here to help. Fill out our short What’s Next questionnaire to get in touch for a free phone consultation.

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