In 2022, a lot of companies are starting to address their responsibility to collect and remit sales tax – but state sales tax compliance is a tricky subject. In a rush to get it right, we’re starting to notice a couple troubling trends.
Since the Wayfair decision in 2018, and the passing of economic nexus thresholds in every state, companies at the beginning of each year make efforts to understand possible sales tax liabilities. This can also occur when companies are planning to buy, sell, or merge with other companies. But first, they have to figure out their sales tax responsibility (maybe there is no liability). To do this, there are three questions every seller should ask about their company’s sales tax situation in each state:
#1) Do I have nexus?
You can establish nexus by either having a physical presence in the state or selling enough taxable goods or services to meet a threshold that establishes economic nexus in the state.
#2) If I have nexus, is what I sell taxable?
Every state categorizes products and services and determines whether they are taxable or exempt. You may be selling products or services that are taxed in some states but exempt in others.
#3) How do I sell my products or services?
If you sell them yourself, you’re probably responsible for collecting and remitting that tax. If you sell them through a marketplace facilitator, that marketplace facilitator may have the responsibility to collect and remit that tax.
After answering these questions, many companies learn that they have a responsibility to collect and remit state sales tax in a lot more states than they first thought.
As companies do their due diligence on becoming compliant, they usually find an automated solution that does a good job applying and collecting the right amount of sales tax on each transaction – which is amazing. However, this is also where we’ve started to notice some troubling trends that come into play with state sales tax compliance.
Troubling Trend #1: Companies are Collecting More Than They’re Remitting
We receive a lot of calls from companies with automated sales tax return solutions, and we get a common complaint: Their automated solution is remitting more money to the state than it’s collecting.
So, in addition to the monthly fee for the service, they’re now paying state sales tax out of pocket. That extra expense can be margin-killing.
To top it off, it’s usually very hard to get a straight answer from an automated solution provider on why this is happening. It can be resolved one month, and then appear again the next month. It’s troubling because companies think that they’re getting a “set it and forget it” solution, but when left unchecked, that solution ends up costing them more money than they could have ever budgeted for.
It’s important for you to review the process and even consider getting a state sales tax expert to fill out your returns based on the collections from your automated solutions. Leave the remittance to the people who can give you peace of mind with your state sales tax compliance.
Troubling Trend #2: Notices Are Piling Up for Many Companies
Again, we believe automated solutions are great on the collection side. The remittance side is where they struggle. That’s why we suggest enlisting the help of a professional to prepare your state sales tax returns and ensure compliance.
However, even with the best prepared and filed return, you will inevitably receive notices from the state. That leads us to the second troubling trend: These notices are going out more frequently, and they’re beginning to pile up for a lot of companies.
With most states now, if there’s any problem at all with the filing – even a problem the state can resolve internally – a notice will automatically be generated and sent in the mail. Notices can range in their severity. But most notices, regardless of their severity, require a response by a certain date.
If you don’t respond, another notice gets generated, and the state is likely to escalate the situation, taking action that can hurt your business. That can mean freezing your accounts and placing liens on your business. You see how this can turn into an endless negative feedback loop.
This problem is really pronounced for companies that use an automated solution they think they can just set and forget. What ends up happening is, the solution files a return incorrectly, states send notices, and because you’re not checking on it, those notices pile up, leading to consequences with state sales tax compliance down the road.
Another problem with the increase in notices is that states might even be sending out notices in error. You could get a notice that says you owe tax in a state where you don’t have a responsibility to remit sales tax.
Unfortunately, a lot of companies won’t question the notice. They’ll pay the amount to make it go away or make sure they’re not risking further action from the state. It’s a shame, too, because these issues with collection, remittances and notices can be avoided.
Conclusion: A Sales Tax Expert Can Give You Peace of Mind
These state sales tax compliance trends pose problems for companies in 2022, but the good news is both of these issues can be resolved with the help of a state sales tax expert.
Talk to someone who can look at your collections and remittances and make sure you’re collecting and paying the right amount where you have responsibility. Also, a professional can help you sort through those notices and chart the best and most beneficial course of action for your company.
Want to make sure your automated solution isn’t going to lead to problems down the road for you? Sign up for our What’s Next Call. We can help get you sorted.