Are you looking for a way to build your sales tax process to help your business grow successfully? Let’s discuss the pillars of success that outline the principles you need to know.
From Pillars to Profit
What do pillars have to do with sales tax?
Hear me out.
Pillars serve structural purposes. They provide support, stability, and alignment. Pillars serve as protection and prevent damage from external forces. They are an essential component and play a critical role in ensuring stability.
The same thing goes for having a good sales tax process. The right pillars will keep your business safe, stable, and aligned.
So let’s make sure you have your sales tax pillars in place!
1. Start With Nexus
Nexus is the genesis of your sales tax responsibilities.
What is nexus? Nexus is what qualifies a seller to be required to collect and remit sales tax in a state or location. It establishes a connection between taxing states or jurisdictions and your business.
Unfortunately, the definition of nexus isn’t shared across all 50 states, so as a business, you need to look at each state and location individually when determining sales tax nexus.
See our state-by-state nexus calculator here!
Also, watch for changes. Regulations are constantly changing across the country.
2. Taxability of Your Products and/or Services
Each state has its own sales tax legislation, rules, and exemptions regarding how it imposes the sales and use tax on the sale and purchase of products and services. Generally speaking, sales tax is due on tangible goods and not due on labor or services. But you cannot rely on these general guidelines any longer! Every state imposing sales tax has some myriad of exemptions, reduced rates, and/or taxability exceptions on various tangible goods. They are also adding legislation on a consistent basis imposing tax on more and more services. It gets complex when commerce advances ahead of legislation, such as the increased advent of subscriptions (including products and services), software as a service (SaaS), or the sale of digital or intangible goods…
It is essential to be mindful of what products are subject to sales tax so the customer can pay it (and not you, out of your pocket, with penalty and interest, because you didn’t collect it). Laws consistently change, so it requires consistent attention. Making taxability decisions is one of the best areas to utilize automation. Innovative software platforms like CereTax offer their customers peace of mind providing taxability answers in real time.
3. Collecting Tax at the Right Rate(s)
Knowing the correct rate sounds simple.
Just plug in a zip code or city, and *voila* you have your one rate.
But, alas, nothing with sales tax is that simple. States can determine the right rate based on specific zoning districts, specific geographic regions, or tax zones for a particular tax. They also have state rates, local rates, special rates, temporary rates, tiered rates, reduced rates, and on and on…
Again, a software platform like CereTax can save you time, money, and stress when determining your taxability AND rates. A sales tax expert can ensure the products and services you sell are mapped correctly to the taxability codes within the platform, and their roof-top rates can give you the most accurate rate at the moment of the sale. Services can be tricky, as the definition of your service can vary state by state, which creates variables in taxation. A good sales tax partner or professional can help leverage automated software platforms by ensuring accuracy in the mapping process.
4. Collect and Manage Exemption Certificates
Businesses present a sales tax certificate when their goods or services are eligible for a sales tax exemption. The certificate shows that a purchase is for a purpose that exempts it from sales tax.
As a business, you must do your due diligence and ensure the exemption certificates you’ve received are filed accurately. You will be held accountable for collecting sales tax if you don't collect the correct certificate.
Again, automation tools and software can help your sales tax process in this aspect. Not only can software help manage these certificates, but it can also verify you have received the correct form and accurate information. A digitized system will enable you to search your certificates efficiently and look them up quickly if needed.
5. Be Cognizant of Accruing Use Tax
On the flip side, you must look at your purchases to ensure the sales tax has been collected and remitted correctly by vendors from whom you purchase products and/or services.
If your supplier doesn’t charge your business the correct amount of tax, you are financially responsible for accruing the use tax. Failure to do this leaves you vulnerable to penalties and interest charges. If you’re buying items and they’re not collecting the tax properly, you may have to self-accrue and self-remit it to the state to remain compliant.
6. Establish a good filing process
The most crucial pillar; the actual sales tax return filing and remitting of the funds.
Without this pillar, the rest crumbles.
You have to have a sound system in place. You need a consultative approach or in-house expertise to ensure the returns are filed accurately, correctly, and timely.
We highly recommend outsourcing this to someone who has experience and expertise. At a minimum, you need someone managing your filing system diligently who knows enough to handle that process correctly. Why?
Because no matter how clean your sales tax process is, you’ll likely get audited and receive notices from the states.
States send notices even when you’re filing correctly. Notices can be about a balance due or state update; these must be managed and followed up promptly.
If not, they become demands, which will become assessments and can become liens on your accounts. It can escalate quickly; putting them off won’t make them go away.
To build your sales tax process to help your business grow successfully, you will need to develop and implement these six pillars in your sales tax process. By doing this, you will ensure you’re business is audit ready. Here at Peisner Johnson, one of our core values is “Collaboration builds confidence.” If you want to improve your sales tax process, we invite you to get on a free What’s Next call and get some tips and tricks on establishing the best practices. Or, if you’ve already got something good going, find resolution in what you have. We would love the opportunity to help.