When any article on sales tax is above the fold on the first page of any printed or online publication, it’s either a very slow news day or a very big deal. In late June, the business and tax community witnessed a case that made headlines coast to coast. The Supreme Court’s verdict was in and the South Dakota v Wayfair Inc. decision was officially a big deal.
By now, chances are you’ve either developed a fairly good understanding of the genesis of the Wayfair case and its outcome, or know enough about it to know mostly every tax accountant’s clients with online sales will somehow be affected. There still is a lot to legally sort out as the decision is interpreted and applied by the sales tax states, but a consensus regarding its effects is forming.
The consensus among most observers and experts is that multistate sales tax collection and compliance obligations will expand for many sellers. Assuming this is a well-rooted consensus – and I think it is – businesses and their advisors must consider the practical effects of what it looks like to be the new normal.
In many ways, sales taxes are a very local phenomenon with individual states and local government entities establishing taxing jurisdictions based on existing political boundaries or unique boundaries created for sales taxes alone. These many jurisdictions apply rates, set reporting rules and, in some cases, apply their own taxability determinations to transactions within their boundaries. In turn, the states and the local jurisdictions they encompass use sales tax collections to pay for government services and obligations that tend to benefit citizens on a local basis.
Civics 101 aside, the resulting patchwork of applicable rates, exemptions, deductions, forms, documentation requirements, taxability determinations, filing obligations and enforcement techniques presents a daunting challenge. This challenge is compounded when the number of states an organization makes sales into increases. Bottom line? This situation is prime for an automated solution.
Automation of sales tax calculation and reporting is inevitable for many sellers. For most large sellers, implementation of an automated solution is already in their rear-view mirror, yet many others, in the face of Wayfair, are only now considering how to conquer nationwide sales tax compliance. Automation as a principle is a sound one, and the sales tax environment’s complexities make a good case for leveraging the benefits of an automated solution. For most organizations touched by Wayfair, automation provides a valid solution and is a likely outcome for many of them.
The usefulness of an automated solution is unquestioned, but a high-functioning sales tax administration solution requires more than just a subscription. In the wake of Wayfair, it’s imperative that organizations assess their sales tax profile from a high altitude to gain insight into past period issues, current practices that work or don’t work, and stakeholder expectations. This early assessment should address the people, processes and technology currently available or in use, and provide a basis on which to improve an organization’s competency in all three of these vital areas:
- The first step is to create a simple roadmap to be a more efficient, accurate and risk-averse sales tax administration based on a high-level look. Start by looking back, for example. What is the plan to deal with jurisdictions where physical nexus may have existed in prior periods, but in which a company was not registered? What is the status of exemption certificates for exempt buyers in states where the company was not registered previously?
- Next, set some important milestones going forward. Based on existing and soon-to-be-invoked state-by-state rules, what is the expected breadth of a company’s collection obligations? Are the items or services it sells taxable in all jurisdictions?
- Finally, get the most out of any solution. Assess the strengths and weaknesses of the options available. Plan for a seamless integration with existing people, processes and technology, and rely on tax and automation professionals to help meet deadlines and ensure expected outcomes.
The path to optimized sales tax functioning is unique to each organization. Automation is a natural milestone on that path for many companies, but taking the time to draw a map is crucial.
Shane Ratigan is JD, LLM (Tax) is senior tax manager, State and Local Tax, with Clark Nuber in Bellevue, Wash. Contact him at email@example.com.
See inside September 2018
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