The first thing you should do NOW, and the one thing you should not do, at least not yet.
So you are considering starting or expanding your SALT practice? Excellent! In fact, a recent survey of CPA firms pointed out that 75% of firms are looking to add SALT to their portfolio of services. That means you are on the leading edge and many other firms. That's not surprising to us. We are a CPA firm ourselves and focused entirely on providing SALT services since 1992. We speak from our own experience of over 20 years as a firm. SALT is a profitable niche service with opportunities to offer premium services. State governments are increasingly hungry for tax revenues and they are turning up the heat. It's an area of increasing complexity with bigger pitfalls for clients. Your clients need this type of help from their CPA.
There are two main reasons why CPAs should be doing more SALT work:
- The first reason is to protect your clients.
- The second reason is to grow your practice.
Let’s talk first about protecting your clients. That’s where it all starts and ends. And you already know that as you look out for your clients’ best interests, your practice will grow, and state and local tax services (ok let’s refer to it as SALT from here on out), but SALT can help accelerate that growth.
So what's the one thing that CPA should do right NOW to start their own SALT practice? And what’s the one thing they should not do yet? Well, don’t assume you need to go off and hire an outside expert right now. There’s no need to spend that time and effort right now, and risk all that capital. You can do this with your existing people. The one thing to need to do NOW, is attend our free webinar about the opportunity. What is the market? How will you begin the process? What is the cost? What are the possible pitfalls?
The free webinar isn’t a sales pitch. It is substantive information you can use immediately. What will you learn?
First, you will learn about state tax nexus.
Just briefly, what is nexus? Nexus is that minimum connection that a state must have with you or that you must have with the state in order for them to be able to force you to collect their taxes or pay their taxes. It's a simple definition, but the definition belies the complexity arising from actual day-to-day business activities across different states. How do you know exactly where that line is crossed for every activity in each state? What exactly constitutes enough connection? That's where we run into the difficulties. So you have to become more educated in this area.
Why learn about nexus?? Like I said, it’s all about protecting your clients. And learning about nexus will help you to protect your clients. One of the biggest liabilities that could potentially hit a small/medium business is a sales tax audit assessment. Businesses that should be collecting sales tax, but are not, face a growing liability every month. Upon audit by a state, they would be assessed that uncollected tax. It would be a tragedy, we call it the Biggest Tragedy in Sales Tax, because they would have to pay that tax out of their own pocket, which tax they could have collected at the time of the sale from their customer. Add add on to that penalties and interest. That’s why a sales tax audit is potentially devastating to a business. Much more so, usually, than if they were audited for income taxes. Income taxes are generally due on your net income earned in a state. Usually income taxes are largely due in the home state. But sales taxes, as you know, are a transaction tax due on a sale regardless of the profit. Stop and consider this: By understanding sales tax nexus and helping your client to take action, you may actually be preserving your client’s ability to continue as a going concern.
But first you have to understand what the current “laws of the land” are when it comes to nexus. A lot of businesses (and their CPAs, unfortunately) labor under the false impression that nexus requires physical presence in the form of an employee or an office building in a state. The truth is, it takes a lot less than an employee or a building to create nexus. I invite you to see our short video our five most common nexus-creating activities for some more information on that. It may surprise you how low the threshold for nexus truly is.
Once you understand what activities create nexus for sales tax, then learn the nuances of income tax nexus. If you have nexus for sales tax, you don’t automatically also have income tax nexus in every state. Nexus for sales tax and income tax is like two circles that have large intersecting areas but also have their own independent tests as well. As such, it’s possible that you might not have nexus for sales tax but you do have nexus for income tax.
Sales tax nexus is usually the biggest hotspot for your clients, because it carries so much potential exposure. But you also need to be ready to answer your clients on income tax nexus and take action to protect them from potential exposure there as well.
Growing Your Practice
Protecting your clients from state tax liabilities will grow your practice if you know what services they need. Here are some of the solutions you can offer or services you can perform to help protect your clients from the exposures with state tax nexus.
- Nexus consultation and analysis
- Exposure analysis
- Voluntary disclosures and amnesty
- System automation for sales tax collection. Get the rates right and constantly updated.
- Tax return preparation and filing
Once clients realize where they have nexus, clients’ usual reaction is to want to get registered in those states right away and start collecting/paying the taxes. But that could be the worst thing to do and you need to understand why. They may have past exposure that needs to be dealt with first through voluntary disclosures and amnesty programs. Once past exposure is resolved, then they can register and begin collecting and paying the appropriate taxes. This can seem daunting with thousands of taxing jurisdictions with changing tax rates and different taxability rules. And it is daunting if you try to handle it manually. Most likely they will benefit automating the process using a reputable third party service to track the ever changing rates and taxability of items they sell.
CPA’s can get involved in helping their clients get the system automated and all set up. Then on an ongoing basis, the CPA can assist with the return filing. Sales tax returns are due either monthly, quarterly or annually and income tax returns are due usually on an annual basis.
And that’s how your business grows as you protect your clients’ vital interests.
Of course, there’s more, much more, you can do under the umbrella of SALT. There’s consulting and research into taxability of items your clients purchase. There are so many different laws and cases that impact whether what they buy in a given state is even taxable. You could save your clients real money as you help them analyze their larger purchases. You could even identify areas where they have overpaid the taxes and secure refunds for them. Talk about premium, value-added services! As you grow your SALT practice you could get involved in the lucrative service of assisting your clients with revenue agent reviews at the state and local tax level. You may be very surprised how often your own existing clients are under audit by a state. Hopefully this gives you an idea of where you can take this as you gain expertise. And we can teach you how we’ve been successful and you can just replicate (and improve, I’m sure) on what we’ve done. But that’s down the road a bit.
The first step, in my opinion is to learn all about nexus and how those laws apply to your clients. And fortunately we have lots of resources available to you to become much more knowledgeable on what creates nexus. Learn what the current nexus standards are, and how they evolved to this point. What is the US Supreme Court’s role in determining nexus, what is congress’ role and what about state governments, do they have a say? What about movements to pass a federal law on this issue? Has that ever been done, if so, what are the federal rules? Are there different standards of nexus for income tax vs sales tax? If so, why? Did you know, for example, that it's actually easier in most states to have Nexus for income tax purposes that is for sales tax purposes? You will learn all that and a whole lot more. Once you learn all that then you will see how you can use it to benefit your clients.
5 Hotspots Checklist:
- Nexus: Sales into which states; Employees in which states; Independent contractors in which states; Conferences attended.
- Rates & Product Taxability: Verify sample of rates; Make sure tax is collected.
- Use Tax: Do you have a process in place to track use tax? Make a purchase and don't pay sales tax? Look for use tax issues. Pulling inventory off the shelf, even gifts to charity? Sample of fixed assets.
- Exemption Certificates: Do you have a process in place to collect and validate certificates? Review samples of certificates signed, not expired, correct permit number.
- Returns: Is there a process in place to file returns? Are you taking advantage of necessary discounts for prepayment?
We also have training that we can offer to you for how to actually conduct nexus reviews and consultations for your clients how we charge for it; what's the going rate; and what are the deliverables. All these things we can make available to help you begin now to expand your state and local tax service offering. Which automatically leads to recurring work on the compliance.
- SBA: Learn about your state and local tax obligations:http://www.sba.gov/content/learn-about-your-state-and-local-tax-obligations
- NOLO – 50-State Guide to State Laws: http://www.nolo.com/legal-encyclopedia/50-state-guide-internet-sales-tax-laws.html
- Streamlined Sales Tax Project: http://www.streamlinedsalestax.org/
- Marketplace Fairness Act Information: http://www.marketplacefairness.org/
- State and Local Sales Tax Rates in 2014:http://taxfoundation.org/article/state-and-local-sales-tax-rates-2014
- How State Sales Taxes Work: http://money.howstuffworks.com/personal-finance/personal-income-taxes/state-sales-taxes2.htm
Andrew H. Johnson is a cofounder and principal in Peisner Johnson, one of the largest SALT (State and Local Tax) practices in the United States.