By now, all taxpayers have likely been impacted in some way by the 2018 Supreme Court decision of South Dakota v. Wayfair, which forever altered the sales tax nexus landscape. Whether from sales tax appearing on purchase invoices that historically were blank on the tax line or businesses filing voluntary disclosures and completing registrations in seemingly every jurisdiction in America, the effect has been felt everywhere. The Wayfair decision — which sought to make compliance easier — has begged more questions on how to properly comply with state sales tax laws and has led taxpayers to revisit their entire sales and use tax function. Fortunately, plenty of tools are available to manage a filing footprint that grew dramatically overnight for many taxpayers.
As a baseline, when updating sales and use tax processes, a company must first understand its current sales and use tax practices to grasp the full scope of how tax is being handled within the ERP system all the way through which state and local returns are being filed. In addition, a nexus and exposure analysis should be performed to ensure all applicable returns are filed. Any filing gaps and exposure identified during the nexus review should be remedied immediately to limit tax, interest and penalty as much as possible.
To outsource or not to outsource
Pre-Wayfair, a limited staff could handle a company’s sales and use tax filings in the small handful of states in which they operated and essentially ignore most of the remaining states, claiming a no-nexus position. Now, with a relatively low threshold in each state, nexus is triggered with ease. The number of monthly returns to be filed can skyrocket and has overwhelmed many companies. As a result, outsourcing the entire compliance function to a third-party provider has become a popular option.
When evaluating outsourcing options, it is important to understand the current state of your staff’s overall workload capacity and their specific expertise in handling sales tax matters. While compliance can be straightforward, many traps for the unwary can lead to unfiled or unpaid returns, generating a mountain of notices. Handling notices and sales tax audits (which are almost a sure thing at some point) can be a full-time job. If your company does not have the staffing to stay on top of current tasks, perhaps an outsourced arrangement may make sense.
Before entering into an outsourcing agreement, taxpayers should understand the costs and services to be provided upfront. Some providers charge an “all-in” fee, which covers all fees associated with filing returns, up to and including payment. Other providers break down fees on an item-by-item basis (such as filing fees, payment fees, notice fees, etc.). While this may be helpful if companies do not want to completely outsource their compliance function, it can get confusing when options are being evaluated.
For taxpayers who elect to keep compliance in house, the good news is that as a result of Wayfair, there are plenty of software options for all budgets to assist in the accrual, review and filing of sales and use tax returns. Using sales tax software can save time and resources and allow companies to focus their efforts on more productive tasks. However, depending on the company’s size, implementing sales tax software can be a large financial undertaking and time commitment.
As taxpayers evaluate software options, items they should consider include budget, compatibility with ERP systems, industry-specific issues (i.e., industries such as construction have complex transactions and certain software programs may not be effective), and timing to fully implement and “go live.” A properly implemented sales tax software system can be a major factor in streamlining internal sales tax procedures. On the other hand, an improperly implemented software or one incompatible with a business’ operation can cause significant issues.
For the most part, guidance surrounding economic nexus legislation (and perhaps rightly so) is centered on properly registering, collecting and remitting sales tax. However, taxpayers should also take the opportunity to review the use tax accrual process as well.
Many previously untaxed purchase transactions likely now include sales tax. If use tax accrual processes and reviews have not been updated, it is possible that use tax is being accrued on transactions that already include sales tax, especially if sales tax is not a separate entry in the accounting system. Additionally, many taxpayers who have registered to collect sales tax as a result of establishing economic nexus have started collecting sales tax on all transactions where customer exemption certificates are not on file. This may lead to tax being included on transactions that should be exempt, especially in manufacturing and other industries with many exemptions available.
Each of these situations may lead to refund opportunities. However, refund claims may often lead to audits, so it is vital to understand both the potential refund and exposure before taking any action. A review of the use tax accrual and purchase process may catch errors early and eliminate the need for a refund claim.
Now that economic nexus is the standard throughout the country, companies should take this opportunity to refresh sales and use tax policies and procedures to ensure all returns are being properly filed in a timely way and all taxes are appropriately paid. A bit of effort in the short term can help save time and money in the future.
GBQ can assist in your efforts toward complying with the ever-changing tax sales landscape. Contact a member of GBQ’s State & Local Tax Services team made up of experienced professionals available to help plan and manage the state and local tax needs of progressive, local and nationally focused companies.
Article written by:
Jeff Monsman, JD
Director, State & Local Tax Services