By Bruce Krumlauf, Contributing Writer
From the August 2005 Issue
The term sales tax means different things to different people. Your definition may be narrow or broad, but in the world of tax compliance today, sales and use taxes practically include any type of transactional tax, fee or surcharge. Accurately calculating the amount of sales or use tax owed, and accurately determining the party to which it is owed, is not as simple as it may appear at first glance. The factors affecting the calculation and filing of a sales and use tax include the following:
• Nexus determination
• Situs determination
• Taxing jurisdiction
• Profit or non-profit status of the entity from which you are collecting the tax
• Other special tax status situations, such as agricultural exemptions
• Special “tax holidays”
• Taxability status of the product or service
• “Bucketing” decisions
• Summarization decisions
• Forms decisions
• Minimum and maximum taxes
• Taxes on tax
Sales and use taxes are an important stream of revenue for states, counties, cities, townships and other non-federal government entities. As such, those entities tend to be particular about the accurate collection and disbursement of taxes and fees they believe are owed to them. Taxing entities have the ability to back up their claims with substantial penalties, fees and fines. Consumers and businesses, on the other hand, consider taxes an unpleasant financial burden at best. They tend to be particular about not paying more than they must. In extreme cases of mistaken tax collection, they back up their claims with individual and class action law suits. As the entity calculating, collecting and forwarding taxes to government jurisdictions, businesses are caught in the middle of both of those sets of expectations.
Once all of the above variables are accounted for, accurate and timely tax collection and payment involves the completion and filing of forms. With approximately 10,000 different taxing jurisdictions in the United States, keeping track of and filing the correct, latest-version forms for the correct amounts is a daunting task. Even with that, the taxation cycle is not complete once a form is filed and payment sent. The ability to track and reproduce the data-gathering and decision-making process that went on behind the scenes to fill out the form is a vital step. And with the broadening implications of Sarbanes-Oxley regulations, having a transparent, accessible audit trail is more important than ever.
VS. COMPLIANCE ENGINE
A reproducible, auditable trail is the major difference between form filing software and true sales and use tax compliance software. A compliance engine gathers other information from the transaction in addition to revenue. For example, it pulls multi-faceted data to make complex situs decisions. Where the transaction takes place determines who gets the taxes, but defining that spot is not as simple as it may sound. If a consumer who lives in New York City orders goods from a company in California, which has the goods shipped from a warehouse in New Mexico, determining situs for taxation purposes becomes a multi-step process that also must take into account nexus data.
As more companies market and deliver goods and services through multiple locations and multiple modalities, such determinations grow exponentially more complex. Even taxpayers who are conscientiously working to keep up with collections and disbursements can be caught off guard. For example, an out-of-state vendor of masonry products was determined to be liable for uncollected Wyoming sales and use tax on sales to Wyoming customers. The sales were judged taxable because they were destination sales in which the transfer of title and possession occurred in Wyoming, even though the taxpayer customarily employed common carriers for delivery.