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2013
2. Use tax
Use tax is a tax imposed on a consumer for the storage, use, or consumption of tangible personal property (TPP) when sales tax was not paid on the original sale. Use tax is the complementary tax to sales tax and is typically assessed at the same rate as any sales tax that would have been owed. Purchases made over the Internet and out-of-state are the most common types of transactions subject to use tax. Use tax must also be paid when a business withdraws goods from inventory for its own use, if sales tax was not paid on those items at the time of purchase. Unfortunately, this is only the beginning of the sales tax survival challenge in 2013. Current state and federal proposals to change remote sales tax collection requirements add to an already difficult compliance environment for businesses.
WHY STATE AND FEDERAL CHANGES WILL IMPACT YOUR BOTTOM LINE THIS YEAR
It doesnt take a policy expert to gather from headlines that states are actively crafting laws requiring online retailers to collect sales tax. What many businesses dont realize, however, is that remote sellers such as distributors, manufacturers, and multi-level marketers might also be impacted. Cities, counties and states regularly change these rules, making sales tax compliance nearly impossible for most businesses. These changes often include: Product and service tax exemptions. Sales tax holidays. Boundary adjustments. Rate increases or decreases. Managing these changes is made more difficult by the state and federal changes detailed below.
local retailers are required to do. Under the proposed legislation, out-of-state sellers that make more than $1 million in gross receipts annually would collect sales tax in states as long as the states simplify the process, though this threshold is likely change if the bill becomes law. On average, sales tax compliance costs small and midsized businesses three to 15 cents per sales tax dollar collected. According to the U.S. Census Bureau, failure to account for that expense is one of the principal causes of small and mid-sized business failure in the United States. Why? The components of this compliance expense are difficult to pinpoint and often overlooked. The costs are hidden in staffing, compliance, accounting systems, information technology, and other business infrastructure. In addition, sales tax compliance is a pass-through activity that adds no value to the bottom line. Sales tax collection requires your business to act as an agent of each state in which you have nexus and collect and remit sales tax accordingly. And if you dont do it correctly, accurately and on time, your business can face heavy fines and penalties. The following survival tips can help you meet some of these challenges in 2013.
Does sales tax compliance apply to your business? That depends upon a set of regulations known as nexus rules. According to a series of Supreme Court decisions that culminated in Quill v. North Dakota, an out-of-state business must collect sales tax on behalf of the state, if it has a substantial physical presence in that state. Unfortunately, the Court did not define substantial physical presence, so each state has established its own set of regulations. Examples of nexus-creating activities include: holding a business license, owning tangible property or establishing a headquarters in a given state. By doing these things, a business agrees to be an agent of that state to collect sales tax and remit the funds back to the government.
Many states are addressing budget gaps by increasing product and service taxability. Your business must determine which items require tax, and capture variations arising from the location of the sale. While most states dont collect sales tax on grocery items, many do tax processed foods that contain certain ingredients. Service taxability varies greatly from state to state. States like Delaware, Hawaii and Washington tax a large number of services; other states such as Alaska, Virginia, and New Hampshire tax very few. As taxing jurisdictions change their rules about taxability of goods and services, your business is required to adjust your accounting systems accordingly.
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Dont make assumptions about geography. Many businesses make the mistake of searching for the correct tax rate by ZIP code, assuming this will give them accurate information. Unfortunately, taxing jurisdictions do not follow ZIP codes. Geospatial mapping, on the other hand, can pinpoint each location against a specific taxing jurisdiction.
For each taxing jurisdiction, a business must meet filing deadlines and provide timely remittance using correct forms and formats. This step sounds simple. And for many businesses it may be easy, especially those with only one location. In this case, the business would be responsible for collecting sales tax at the rate applied in its home city. Things grow more complex when the business adds a location. And then another. With each new city or state, there are a host of new guidelines addressing filing and remitting.
Not all customers must pay sales tax. Depending on the rules in your taxing jurisdiction, certain businesses and individuals are exempt from sales tax. It is incumbent on the vendor to collect and keep on file a valid exemption certificate. You must ensure that exemption certificates are valid for each sales transaction. This requires your business to keep a copy of each exemption certificate. For easier accounting, a database or spreadsheet of exemption certificates should be easily accessible. The best solutions tie directly into your point-of-sale system, making it simple to verify that exemption certificates are current, valid and on file.
EXAMPLE
An auditor reviews a sample of 20 transactions in which no sales tax was collected. Exemption certificates for four of those transactions are not on file and immediately available. The auditor can extrapolate the results of that sample and claim that 20 percent of your companys non-sales-tax transactions are invalid. Those taxes would then be assessed, as well as penalties and interest.
So how can a business make the sales tax compliance process more efficient, while also minimizing the risks inherent in compliance?
I was managing all the sales tax rates and it was a lot of work. It was also very difficult to get the reports that we needed to file the sales tax returns. Thats when we decided we should automate and look for a sales tax solution. We didnt want to have a server in-house to support. One of the other sales tax solutions we were looking at was also a lot more expensive. AvaTax just seemed more cost-effective and we liked the idea that it was hosted. ~ Danielle Jaworski, Controller at Breitling USA
Our biggest audit hit was the exemption certificates and the notax sales. So we decided to go with AvaTax Certs. We really feel strongly that it is going to be a good tool for us to help with audits, to reduce our liability with states, to reduce the frequency of state and multiple jurisdiction audits. We needed to outsource part of our sales tax to make sure we were compliant. Avalara had what we were looking for. Everything fit. ~ Heather Gravelle, Sales Tax Manager at Furniture Row
1. Contact Avalara for a custom analysis of your potential sales tax collection requirements in all of the jurisdictions in which you currently operate or into which you plan to expand. 2. Take the next step toward automating your sales tax process. CALL: 877-780-4848 VISIT: www.avalara.com/products/avatax
About Avalara
Founded in 2004, Avalara pioneered a service-based platform for sales tax and compliance automation and has been recognized for years as one of Americas fastest growing technology firms. The companys cloud solutions help thousands of customers stay focused on their core businesses by providing automated end to end compliance services including sales and use tax calculation, exemption certificate management, filing and remittance, and a broad array of related services.
ADDRESS VALIDATION
CERTIFICATE REQUEST
LIABILITY WORKSHEET
SOURCING RULES
COLLECTION WIZARD
RETURN PREPARATION
JURISDICTION ASSIGNMENT
PRODUCT TAXABILITY
RETURN ARCHIVE
REPORTING
RENEWAL MANAGEMENT
NOTICE MANAGEMENT
Real-time access to the most current rates and taxability rules within any ERP or billing system. AvaTax dynamically delivers 100,000+ taxability rules and applies them across 11,000+ jurisdictions at the point of transaction, within any ERP or billing system.
Limit your non-taxed transaction audit liability. Ensure that valid certificates are immediately accessible through electronic collection, storage and management.
Ensure timely and accurate transactional tax filing and remittance - with simplicity. File returns and remit payments on time using a single payment solution. Whether the jurisdiction requires e-filing or mailed in hard-copy returns, Returns performs the job.