How to manage sales tax obligations

So you’ve done the smart thing and determined that your company has sales tax obligations in various states. That’s a great first step. Now you must collect, file, and remit sales tax in multiple states.

You have multiple options: manage everything in-house, outsource compliance to an experienced provider, utilize sales tax specific software, leverage some combination of all of these, or do nothing and roll the dice. (We don’t recommend that third one. The penalties for non-compliance can be substantial – with company leadership on the hook for liability.)

Let’s look at your choices.

Long list of tasks

Your compliance process should start with identifying sales tax nexus and determining taxability of your products and services in those states where you have sales tax nexus. You then need to create a billing process to apply tax to your invoice, manage your sales tax-exemption certificates and prepare and file sales tax returns.

Not to mention one of the most critical steps: Paying jurisdictions where you’re registered to collect and remit and maintaining a paper trail to include proof of mailing.

You also have to manage and respond to all of the notices from jurisdictions (and there will be a lot), manage sales tax audits, respond to nexus questionnaires by the jurisdictions, and maintain an accurate tax calendar to include changes in filing frequencies as well as filing and payment methodologies.

According to our recent survey, more than a third of financial execs of online businesses are still trying to figure out how to manage sales tax obligations more than four years after the Supreme Court’s Wayfair decision and the proliferation of economic nexus thresholds. Only slightly more than a third (36%) are happy with how they manage sales tax.

Options

The options for managing sales tax include an in-house approach, outsource compliance to an experienced provider, and/or utilize sales tax specific software. Some companies will find it beneficial to use a combination where perhaps they use sales tax specific software to apply sales tax to an invoice but then outsource other components including the return preparation and filing.

In-house. If you’ve got the resources (including the time), this can be a good route. Your staff can be trained for the specific sales tax needs of your company, and you’ll have an in-house resource for future questions. Our survey showed that almost half of companies prep and file sales tax returns in-house; even more use in-house staff to remit sales tax payments to jurisdictions and manage jurisdictional notices.

To manage the process in-house, you must either use the staff you have, or hire. Hiring will come with expenses similar to those of adding any staffer: salary, benefits, office space and so on.

Can your current staff take on this additional responsibility? This saves you upfront costs, but ask yourself: How many employees will it take to handle your current and future sales-tax obligations? Does your current staff have time and bandwidth to tackle a new project as complicated as sales tax compliance? What will be their reaction to the new workload?

There’s another consideration for going in-house: The legal liability and risk is all yours if you miss a compliance matter.

Outsourcing. Around one in five respondents to our survey use outsourcing for sales tax obligations. You can outsource to a variety of software companies, CPA firms and other specialty companies, but there are questions you should ask before trusting an outside company to manage your sales and use tax compliance:

• Do they specialize in tax compliance at the state and local levels?
• What’s their customer service? Can you reach someone when you need to? Are they based domestically or offshore?
• How much of the process will they manage? If there’s an error, who’s responsible for the penalties and interest?
• Are they qualified (remember: sales and use tax practitioners usually aren’t regulated)? Are they experienced with auditors? Will they assist you if you are ever audited?

It’s critical that you conduct a thorough review of the sales tax compliance process and have a detailed understanding of which steps of the process each provider supports.

Software. There are numerous sales tax software solutions that promise to remove the complexity of sales tax from your life. They often have a great marketing message but reality sinks in for some businesses when they discover that a fully automated process is either not possible or it presents its own risks. These automated solutions are often greatly beneficial in getting the sales tax on the invoice, but they struggle to manage nuanced components including responding to notices, updating the tax filing calendar, and reporting specialty taxes like the Colorado retail delivery fee or the Washington B+O tax – both of which are non-pass-through taxes. Their software was never designed and set-up to fulfill all aspects of the compliance process.

Combination. For many companies, investing in a combination of technology and outside consultants is a great option. The software can be utilized to charge sales tax correctly, but the outside consultant can manage the rest of the sales tax process – rather than you becoming a sales tax expert yourself.

If you are looking to reduce costs, increase efficiency and minimize the substantial risk of noncompliance, reach out to a sales tax expert. Consider working with TaxConnex. Contact us to learn what it means when sales tax is all on us.