Since sales tax was first introduced in the 1920s, the way Americans buy has shifted from store visits and catalog sales to online purchasing, front-door delivery, and digital downloads. These delivery methods have—at times—eroded “physical” nexus, what was once the only basis for sales tax obligations. However, evolving technologies helped lead to the concept of economic nexus.
On June 21, 2018, the United States Supreme Court decided in Wayfair, Inc. v. South Dakota to permit states to expand nexus to economic presence, creating the ability to enforce the collection of sales taxes from remote sellers. These sellers, including resellers, wholesalers, manufacturers, and service providers, now must understand who they are, where they are, and how they need to comply with sales tax laws and regulations that differ across more than 10,000 tax jurisdictions.
Sales tax compliance is complicated. Sales tax, like payroll tax, is a fiduciary tax. The money collected belongs to the government, and when those funds are over- or under-collected (or not collected at all) the stakes can be high for responsible parties.
To assist with this, your clients may lean on you for support in evaluating automation tools. Here are a few questions to keep in mind as you advise them.
Where do you have a nexus?
Verify that your clients are aware of each jurisdiction in which they have nexus and have accounted for both physical and economic nexus. This can be especially critical if your clients have any e-commerce sales and are selling in a state but do not have a physical presence there. Additionally, if your clients participate in conferences or have employees who work in different states, that could also trigger nexus.
Make sure your clients understand the legal and practical business considerations of registering in one jurisdiction and not another, and the implications on other tax types, such as income and payroll taxes. Exemption certificate management, resale certificates, and business licenses all need human insight and management. Working with a qualified sales tax consultant through each facet of compliance and management can help make key decisions about compliance.
What sort of software do you need?
Different companies will offer different service plans. Work with your clients to find one that checks off all the boxes you need. For example, are your clients currently operating in the cloud? Do they plan to do so in the future?
Or do your clients plan on expanding the company in the short- or long-term? Maybe they are planning to add customers that will require exemption certificate management. Are you looking at companies that offer managed service add-ons like that? It could also be beneficial to find sales tax automation providers that specialize in different-sized businesses, such as enterprise-level versus small- to medium-sized companies.
Some software providers also provide sales tax registrations, nexus studies, and voluntary disclosure agreement negotiations. All these services are strictly sales tax oriented—they are not necessarily addressing other business taxes that arise from a sales tax registration. So, a coordinated effort with internal resources, software vendors, and a state and local tax expert is imperative to ensure a holistic strategy is applied.
In the end, the business, not the software provider nor the outside CPA or attorney, is responsible for the proper application of sales and use taxes. It is important to understand what you are buying and who in the compliance management chain is responsible for what.
Are you choosing a solution to solve YOUR business needs?
With so many software vendors and features to choose from, the selection process is typically difficult. In addition to the technical components that must match up, all selections require that businesses make key decisions around internal resource allocations, maintenance protocol, and ongoing administration. Hiring a product-agnostic expert can help you vet each option, choose the right solution for your operations, and implement appropriate management procedures for compliance.
Although every business taxpayer enters the selection process with a unique set of facts and circumstances, there are some best practices for choosing the right software for the business and ensuring it provides the expected benefits.
- Narrow down choices to two or three real options
- Assess each option for strengths and weaknesses relative to your business
- Deliberately select end-to-end or ala carte pieces for how they integrate with legacy systems
- Implement processes for purchase, installation, and management
- Identify installation obstacles, such as connector integration challenges
- Learn how to get the most out of your choice of tools to free up resources
- Use automation technology efficiently, monitor reports
- Determine the support and training resources that meet your needs
Sales tax is complicated. But the compliance process doesn’t have to be. Help your clients find the best solution for their short- and long-term needs.
Co-Authored by - Judy Vorndran leads the SALTovation team at TaxOps. She has been making sense of state and local tax for businesses for over 25 years. Nancy Steele coordinates state and local tax at TaxOps.