Sales tax compliance is an existential challenge for many businesses in the U.S. But many businesses still struggle to get it right. In this post, we review the five signs your compliance efforts need fixing – and what to do about it.
Sign #1: You're Ignoring the Problem
One of the most expensive mistakes a business can make is to ignore their sales tax compliance. State audits will eventually catch up to you, and the costs can be devastating.
If you’re hoping that your years of exposure will go away, they won’t. The only way to rectify the problem is to attack it head on.
If you’re unsure of what your next steps are, a great place to start is with a sales tax consultation.
Sign #2: You Don't Know Where You Have Nexus
To achieve compliance, you have to know what your total liability is. And if you don’t know what your liability is, or where you have that liability, you could be in trouble.
The only way to address your liability is to know precisely what the total exposure was. And to know that, you have to identify where you have sales tax nexus.
Nexus is a link or connection to a state that allows that state to impose a sales tax responsibility upon you. There are two types of nexus:
- Physical nexus is when your business has a physical presence in a particular state.
- Economic nexus gives states the right to force out-of-state sellers to collect and remit sales and use tax if they meet or exceed a state’s economic threshold.
The best way to solve this problem is to conduct a nexus review which will estimate your nexus footprint and in which states you have a responsibility to collect tax.
Sign #3: You’re Making Payments Out of Pocket
Despite the serious exposure many businesses face, sales tax isn’t supposed to be a financial burden.
Sales tax is supposed to come out of the customer’s pocket. Your liability isn’t to pay these taxes, but to manage the collection and remittance of them.
If at any point sales tax is coming out of your bottom line, something is wrong with your approach to compliance. This could be from simply covering the payments yourself. Or it could be as serious as a state audit verdict with unpaid taxes, penalties and interest.
Sign #4: You're Not Leveraging Refunds
Sales tax refunds like non-taxable transactions and exemptions are one of the most effective tools for mitigating your sales tax liability. That’s because taking a look at your transactions is likely to reveal exemptions and non-taxable sales that will reduce your liability.
A transaction is non-taxable when the state it happened in doesn’t tax that product. Everyone’s familiar with the fact that clothes and groceries are rarely taxed. But each state has a number of transactions that fall into this category, like supplements, nutrition products and some services.
Similarly, exemptions are state incentives or programs you can take advantage of to decrease your liability. Here are a few examples:
- Many wholesale transactions are tax-free with the right certificates in place.
- In many states, sales to government agencies, schools and other institutions are exempt.
- Every state has unique regulations and loopholes that you can take advantage of. For example, you could qualify for an Arizona manufacturing sales tax incentive if you cook and sell food.
It’s very common for liability estimates and audits to include these types of transactions. By identifying transactions you had no liability for, you can significantly reduce your total exposure.
Sign #5: You Don't Have an Audit Defense Plan
No compliance plan is complete without an audit defense plan. Because if an auditor catches you unprepared, the costs will be devastating.
Sales tax audits are the real deal. They’re tough, prolonged affairs that can cost your business hundreds of thousands of dollars in unpaid taxes, interest and penalties. All of this cuts into your profits and your income.
Despite these high stakes, most companies have no clue what their liabilities are. They don’t spend the time or money to stay compliant and prepared. By failing to understand what they could lose, they unknowingly increase the risk that they will lose everything.
The best way to protect yourself from six figure liability and penalties is to get compliant and develop an audit defense plan. Many businesses also work with sales tax specialists for help with their audit defense.
For most businesses, getting compliant is an essential yet daunting task. Reviewing your situation and total liability is the first step towards compliance.
Need to get your sales tax compliance in order? We’re here to help. Fill out our short What’s Next questionnaire to get in touch for a free 45-minute consultation.