Sales tax compliance can be a major burden for a business. As a CPA your clients are looking to you as a trusted advisor and mentor to help them navigate any and all tax issues. If your clients lose sleep over sales tax, you may find that you probably do, too.
There’s a lot to know, and it can be taxing (no pun intended) to stay up to date while doing all the other functions of your job.
That’s why we have come up with a simple approach in helping your clients stay compliant so they can avoid exposure. We put together this quick guide created for accountants, bookkeepers and CPAs to help keep their clients compliant.
Here are the 3 most important questions to help give you a clear picture of your clients' tax responsibility and potential liability.
Question #1: Does My Client Have Nexus?
This is the pivotal starting point that simply cannot be overlooked. It is crucial to understand the different types of nexus and how a business establishes nexus in a state. The one that is still fresh on the minds of most businesses is economic nexus.
- Economic Nexus is 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 a potential sales tax responsibility.
Let's touch on what established this concept of economic nexus. South Dakota v. Wayfair, Inc. which was decided on June 21, 2018, is a U.S Supreme Court decision that gives states the right to enforce out-of-state sellers to collect and remit sales tax. Even if they don’t have a physical presence in the taxing state. These laws dictate that sellers are responsible for the collection of sales and use tax if they meet or exceed the taxing state’s economic threshold.
To make things more complex, it is important to note that a state’s economic threshold can be based on a few different things. It can be based upon one or more of the following:
- The sales or economic value of sales that come into the state
- Variations of transactional thresholds
- Taxable sales/ nontaxable sales
Economic nexus is mainly what brings CPAs to our door. However, in that process, we often find out they have clients who have had physical nexus established earlier than they were unaware of; which is a perfect segue into the next type of nexus.
- Physical Nexus- this is established by location, employees, contractors and inventory. Basically, any physical presence that your client’s company has in a state.
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 businesses that sell online to multiple states.
For example, eCommerce sellers who sell on Amazon that have distribution centers in other states may fail to recognize that they have inventory in those states which establishes physical nexus. This in turn puts a responsibility on them to register to collect and remit sales tax in that state. Other scenarios include but are not limited to companies that work with third-party contractors, or companies that have employees traveling or living in a different state.
It is so much more than simply having an actual physical presence in a state.
You must know the ins and outs of your clients business operates currently and over the last year or two.
Becoming thoroughly educated on nexus is key to ensuring your clients are compliant.
Question # 2: Is What My Client Sells Taxable?
You also need to know the taxability of their products and/or services.
Taxability laws vary from state to state. Every state that has sales tax has different categories that may be taxable or exempt from that sales tax. This is important information to avoid under or over-collecting sales tax from customers.
Question # 3: Is my Client Responsible for Collecting the Tax?
This is pertinent when determining your client’s tax responsibility. If they have nexus and sell taxable goods, then they may have a responsibility to collect sales tax on those sales. Presuming 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 properly collecting the tax.
These are the most important questions to ask clients as you help them navigate sales tax compliance. When you have sifted through this information with your client, you’re well on your way to resolving any state sales and use tax issues.
Asking For Help When it’s Needed
Being a good mentor and consultant is knowing when to ask for help. We have a few resources we are happy to share with you. Please utilize our state-by-state nexus guide and we will respond indicating whether there's an issue in that state or not; we will provide the background about that state. We are also available to help guide you through any further questions you may have through our free “What's Next Call” and we can provide more education. Even if we don’t have a partnership or agreement, we are always more than happy to provide guidance and peace of mind for you and your clients. There is confidence in collaboration, and we are ready to collaborate.