2012 Review of Sales & Use Tax Compliance Systems

Keeping Up with the Challenges of Sales & Use Tax

From the April 2012 Issue.

I’ve written about the volatility and challenges of sales and use tax compliance for more than 10 years and, despite movements like the Streamlined Sales Tax Initiative and increased efforts from states to recoup lost tax revenues for their battered budgets, I’ll probably be writing about sales taxes for another 10 years or more.

The paradox of sales and use taxes is that it actually starts out quite simple, but can grow into a complex situation almost overnight. For small businesses, particularly those that are geographically stationary, such as brick and mortar stores, the process is fairly straight forward: One tax rate gets collected and sent to the state, often via the state’s online submission website, and perhaps with a few exemptions. However, as the business grows, expands to online sales, partners with other companies, adds delivery operations or opens up additional locations, the challenges add up quickly.

Just as with the Internal Revenue Code, over the years the base concept of sales taxation has been constantly amended by state and local authorities. Tax rates increase,, temporary taxation periods are added along with occasional tax holidays, and to add to the confusion are maximum taxation caps, varying exemption qualifications, exemption certificates and other issues.

Even more so, each state, county, city and special districts may have taxation authority, which can result in hundreds or thousands of changes per year that a business has to keep track of. All of that is compounded when dealing with the ongoing redefinition of nexus and changes in what items are subject to sales tax in some states, but not in others.

The expansion of online commerce has also resulted in many smaller companies experiencing these challenges. By the traditional measure of revenue a local specialty shop might be described as small, but can potentially have sales throughout the United States. Without knowing in advance where their sales will be coming from (and where their products will be shipping to), how can a small web-based business be prepared for the possible reporting requirements of those jurisdictions?

With all of these variables and unknowns, it’s easy to see why so many businesses, large and small, frequently face fines, back tax remittances and even liens for non-compliance. The best way for them to avoid these perils is to be proactive and seek the advice of a professional who knows the issues of sales tax and can determine their collection and reporting responsibilities. For those businesses that have grown from having very simple taxation needs into more complex scenarios, , it may also be wise to invest in a more comprehensive sales tax rate and compliance system. There are two general types of sales tax management systems, and this review categorizes them as such: Sales Tax Preparation systems, and Integrated Sales Tax Rate Engines.

For smaller businesses with fewer sales tax challenges, Sales Tax Preparation Systems can help them or their accounting specialist with the processes of completing sales tax returns and associated forms for filing with the appropriate state agencies. These programs also include tax rates for the jurisdictions they support, which can be used as a look-up system or, sometimes imported into an accounting package. All of the programs in this category in this review offer direct e-filing of returns and electronic remittance to the states and sub-jurisdictions they support.