Sales Tax 101 For The Small Business Owner

Transcription

1 Sales Tax 101 For The Small Business Owner Presented by Brian Mackin Sales Manager Avalara

2 About the Presenter Brian Mackin Small business owner for over 30 years Joined Avalara 5 years ago as a project manager on the Implementation Team Completed over 1000 AvaTax implementations Helps companies using a wide range of accounting programs, online shopping carts, and billing systems get compliant.

3 Agenda What is your Sales Tax Risk Profile? The Challenges of Sales Tax Compliance Take a load off How to minimize audit risk and automate the compliance process Questions 3

4 Polling Question #1 Are you the person at your company who has primary responsibility for sales tax compliance? a. Yes b. No 4

5 Sales and use tax compliance 52% of accounting professionals agree: completing a marathon would be easier to accomplish than understanding sales tax compliance laws. Source: Wakefield Research 2013

6 The state of our States States are still recovering from the Great Recession FY 2017, 17 states projected budget deficits totaling $19 billion NRF estimates $24 billion in sales taxes goes uncollected on the Internet sales Government estimates over 340 billion in sales over the internet in the US in 2015 Therefore As tax-collecting agents of the State(s), they are looking to your business to find more money This increased focus creates compliance risk for you

7 States finding more sales tax revenue by passing new legislation

8 States finding more sales tax revenue by adding new laws The list of business activities that creates a requirement to collect and remit taxes (Nexus) grows each year More industries and products are being classified as taxable be aware of these changes and stay up to date on the taxability research for your product offering

9 Where do States turn for tax revenue? Total State Government Tax Collections by Category Other taxes 3.9% Corporation net income taxes 5.3% Total license taxes 6.8% Total selective sales taxes 16.6% Property taxes 1.6% Individual income taxes 35.3% When general sales tax and selective sales tax are combined, sales tax makes up 47% of total state revenue General sales and gross receipts taxes 30.5% Source: US Census Bureau, 2012 Census of Governments: Finance Survey of State Government Tax Collections at

10 What Is Your Sales Tax Risk Profile? Nexus Where should you be collecting sales tax? Exemption Certificate Management Product & Service Taxability Jurisdictional Rate Assignment Sales Tax Returns Reporting & Audit Defense

11 The Sales Tax Landscape

12 Nexus Where to collect and remit? Quill vs. North Dakota (1992) U.S. Supreme Court The Commerce Clause vs. Due Process Substantial Physical Presence Office or Warehouse Employees Contract Sales Force or Installers Regular Visits The Future? Economic Nexus and the Marketplace Fairness Act Technology is easing the burden making the Commerce Clause argument less compelling

13 Have you created nexus? Do you have traveling sales people in the state? Do you utilize contract labor in the state? Do you have company representatives in the state? Do you own or lease any real or personal property in the state? Do you promote your products or services in the state? Do you participate in trade shows or exhibits in the state? (And every year this list continues to grow)

14 Nexus-creating activities: a growing list Multi-state locations Maintenance/service/repairs Own/lease real property Hosted DataCenters Field sales/service staff Charge Licenses/royalty/fees Direct and/or online sales Maintains inventory Affiliates Tradeshows Commissions to resellers (1099s) Investors/board members Marketing/Web advertising Drop shipments

15 Polling Question #2 How many states require sales tax to be collected/remitted? A. 39 b. 42 c. 46 d

16 What Is Your Sales Tax Risk Profile? Nexus Where should you be collecting sales tax? Exemption Certificate Management Product & Service Taxability Jurisdictional Rate Assignment Sales Tax Returns Reporting & Audit Defense

17 The Sales Tax Landscape

18 1 1 in in 4 4 Companies Companies Don t Don t Track Track Their Their Exemption Exemption Certificates 1 in 4 Companies Don t Track Their Exemption Certificates Certificates 76% have a system for tracking exemption certificates. 24% have no system for tracking exemption certificates. In July 2013, Wakefield Research conducted a survey among 400 accounting professionals using an invitation and an online survey.. These accounting professionals were at companies with $1 million or more in total revenue.

19 Identifying and managing exemptions Three primary exemptions: Product-based (generally does not require exemption certificate) Entity-based (requires exemption certificate) deduction specifically related to the exempt status of the purchaser. Use-based (requires exemption certificate) exemptions covering products and services which are used for a particular purpose:

20 What Is Your Sales Tax Risk Profile? Nexus Where should you be collecting sales tax? Exemption Certificate Management Product & Service Taxability Jurisdictional Rate Assignment Sales Tax Returns Reporting & Audit Defense

21 The Sales Tax Landscape

22 Product and Service Taxability What is taxable in one state, may be exempt in another Check with each jurisdiction for unique product taxability laws Product taxability laws are not consistent Similar products might be taxed differently Different industries have varying taxability rules Non-taxable Taxable

23 Understanding product & service taxability exceptions Rules and rates vary between states The following industries have varying taxability rules: Software / hardware Digital goods Services Medical device / equipment Food / beverage Clothing / apparel School-related products Dietary supplements

24 What Is Your Sales Tax Risk Profile? Nexus Where should you be collecting sales tax? Exemption Certificate Management Product and Service Taxability Jurisdictional Rate Assignment Sales Tax Returns Reporting & Audit Defense

25 What Is Your Sales Tax Risk Profile? Nexus Where should you be collecting sales tax? Exemption Certificate Management Product and Service Taxability Jurisdictional Rate Assignment Sales Tax Returns Reporting & Audit Defense

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27 150+ million mailing addresses 11,000+ jurisdictional rules 35,000+ sales / use / rental tax rates ~ 30 M product / service exemptions 750,000+ buyer / seller exemptions

28 Polling Question #3 How does your company determine where to collect sales tax? a. Collect in states with employees or offices b. Collect in states where we have employees, offices, contractors, or inventory. c. I don t know. 28

29 What Is Your Sales Tax Risk Profile? Nexus where should you be collecting sales tax? Exemption Certificate Management Product & Service Taxability Jurisdictional Rate Assignment Sales Tax Returns Reporting & Audit Defense

30 The Sales Tax Landscape

31 Remitting sales tax the right way Make sure you know the sales tax return deadlines Filing Frequencies can change Check with each jurisdiction for filing requirements Jurisdictions typically send out notices in advance of a filing change Even if you don t receive a notice, you are still expect to meet the new filing deadlines

32 Remitting sales tax the right way Find out whether the jurisdictions require pre-payments Adjust your calendar accordingly (filing frequency requirements vary) Pre-payments can have different filing schedules than regular returns

33 Avoid these common mistakes Failing to file a return Failing to report sales Taking excessive credits or exclusions on a return Filing returns with errors Return information that doesn t match other records Mistakes found in previous audit Previous finding of exemption certificate misuse Not reporting use tax

34 Manual sales tax management is timeconsuming, risk prone, and expensive 11 hours per week Average time spent filing sales tax returns and remitting payment Percentage of businesses that believe a sales tax auditor would find a mistake Average total cost for businesses to manage a sales tax audit Source: Wakefield Research, July 2013

35 Sales Tax Returns - Sales Tax Returns

36 Reduce audit risk Keep your sales tax collection records in perfect order Clear and complete Easily accessible Show details of each transaction

37 Polling Question #4 4. How does your company store exemption certificates? a. Collect them manually and store them in folders or a file cabinet. b. Collect them manually and maintain an Excel file to manage them. c. Collect/store them electronically, and I am confident all of them are current. d. Collect/store them electronically, but I m not confident all of them are current. 37

38 Pay Use Tax Sales tax Intrastate transaction, Collected by the seller on the gross receipts from a retail sale Seller s Use tax Interstate transaction, where the seller is compelled to collect tax because of Nexus Consumer s Use tax Purchases of equipment and supplies from out-of-state for use in business Withdrawals of inventory for taxable use such as R&D, promotional materials, warranty repairs, etc.

39 Bundled Transactions: Defined A Bundled transaction is a sale of multiple sales tax objects with a single sales price. The sale may include both taxable and nontaxable objects. The vendor charges a customer one sales price for all objects sold instead of separately charging for each individual object. 39

40 Bundled Transactions. Why? As services take a larger and larger role in commerce, more and more transactions include an element of service. Stand alone services, or at least those separately stated, present a significant challenge in determining taxability by themselves. Bundling services with TPP compounds the challenge. 40

41 Know the difference between Bill to and Ship to Sourcing. Most states are destination-based (they charge sales tax based on the location of the end-user), there are several that base sales taxes on the seller s location.

42 How to reduce audit risk You should: Do a nexus study Stay up-to-date with rate, rule, and boundary changes Report consumers use tax Be compliant from day one, especially new businesses Automate with technology Make sure you have: An understanding of your filing requirements Calculations that are rooftop accurate Product taxability coverage Detailed sales records A process for managing exemption certificates

43 Polling Question #5 4. How would you rate your difficulty in managing sales and use taxes correctly across the many jurisdictions where your company provides products and services? a. Easy b. Moderate c. Difficult d. Impossible 43

44 How AvaTax Works A Tax Engine in the Cloud Connector Transactional Data Returns & Remittance Rates & Rules AvaTax does not support cash basis accounting - must be accrual

45 Questions: Brian Mackin Sales Manager Direct Line: (206) x 1141 Brian.Mackin@avalara.com 45