The Hidden Cost of Interstate Sales Tax

One of our team members read through CPA Trendline’s “The Hidden Cost of Interstate Sales Tax” and wanted to offer summary and insight.

CPA Trendline highlights a grim reality: emerging small, and medium-sized businesses are struggling to remain sales tax compliant post-Wayfair.

Ever since South Dakota v. Wayfair, Inc., states can collect sales and use taxes based on a business’s economic presence in that state. These requirements are a significant change from pre-Wayfair sales tax laws which stated a business needed to have a physical presence (either employees or buildings) in a state to be obligated to collect sales taxes. Since each state has varying thresholds for their “economic nexus”, businesses of all sizes are having trouble keeping up with where they are required to collect sales taxes, which of their products are taxable, and how to properly file in each territory where they’re responsible to collect.

Compliance confusions are costing businesses money.

CPA Trendlines estimates around 39% of small business clients have some sort of sales and use tax compliance issue, especially related to economic nexus in states where they don’t have a physical presence.  Avalara recently conducted a survey to get an idea of the cost companies were shelling out to solve these problems internally.

They found that businesses with less than 20 employees were spending roughly $12,000 a month paying and hiring employees to deal with compliance.  As the size of one's business grows, Avalara found that so does the amount of money spent attempting to resolve tax compliance issues. In fact, businesses with 20-50 employees averaged almost $18,000 in tax costs.  Along with that, Avalara's survey revealed that 62% of medium-sized businesses and 39% of small businesses hired entirely new team members to handle their compliance issues which is a costly solution. While these numbers vary by industry and hurt businesses across all levels, costs proved to be the worst for retailers.

Audits generate additional burdens.

Even with 62% of the “small-to-medium” business category hiring new staff to address these issues, 19% were audited for sales and use tax in the past 5 years, adding an average of 35 hours of staff time spent on audit management. CPA Trendlines quotes the following deadly statistics:

• 48% of all surveyed companies were penalized for rate or rule errors.
• 41% were penalized for missing exemption certificates.
• 37% were penalized for late filings.
• 33% got nabbed for failing to register and file.
• 26% had consumer use tax liabilities.

So, what can businesses do?

Fortunately, Agile Consulting Group helps businesses become and remain compliant with sales and use tax every day, and our affordable options for external, ongoing compliance filing are often much cheaper and more sensible than hiring additional staff. We recommend a few initial steps:

1.      Start with a nexus study.

Our first step is to understand where our clients have physical and economic nexus to know where they’re obligated to collect and remit sales and use taxes.

2.      Complete a taxability study in states where you have nexus.

After we’ve narrowed down where you have physical and economic nexus, we recommend assessing liabilities and exposure by doing a taxability study. We determine what part of your product category is and is not taxable in each state where you have nexus. We’ll then provide you with an Excel sheet that you can distribute amongst your accounting team.

3.      Register/Complete VDAs

Once we have an idea of where your company has nexus and what potential liabilities exist, we can recommend the next steps on where to register and collect taxes going forward. We will also suggest states where it may be beneficial to complete a Voluntary Disclosure Agreement (VDA) and ask the state to waive penalties and fees on owed sales and use taxes. We work with each client to recommend best practices based on the client’s risk tolerance, exposure, and our knowledge of how aggressive each state’s audit process is.

4.      Software

At this step, some businesses benefit from incorporating sales and use tax software to help with rate calculation and collection of sales taxes. However, without guidance, businesses are essentially shooting in the dark on how to correctly integrate these software solutions and properly set them up to collect their taxes appropriately. Fortunately, Agile is partnered with most sales and use tax software companies and can not only help you set up your software solution properly, but help you select one and facilitate an introduction.

5.      Ongoing Compliance

As mentioned before, many companies have been hiring costly additional staff to deal with their ongoing compliance issues.  Agile’s ongoing sales and use tax compliance filing service combines the expertise and specificity of having a real sales tax expert filing your returns along with the cost-effective aspect of outsourcing your compliance concerns.

Reach out for a free consultation with one our sales and use tax experts, and we’d be happy to help you tackle this post-Wayfair sales and use tax landscape.