The Truth Behind Sales Tax Audits

Repost from Avalara

With the myriad responsibilities involved in running a successful business, it should come as no surprise that preparing for a sales and use tax audit is not exactly a high priority or favorite topic of conversation among business owners. There are only so many hours in a day, and many companies choose to put examining their compliance process on the back burner; at worst, the idea is ignored entirely. Even business owners who are ready and willing to tackle the issue rarely know where to begin. But sales and use tax audits don’t have to be a specter that looms in the mind of every well-intentioned businessperson. Instead, in the same way, we are told the benefits of “knowing thy enemy,” knowing one’s compliance process as it relates to industry-specific audit risk can make all the difference in the world.

First, an important clarification: Auditors are not the enemy in this scenario, audit risk is. The current tax system is, for many, extremely complex and difficult to navigate, but auditors are simply those tasked with ensuring that business owners — with all the tools at their disposal — are honoring what’s owed to the state. Every year, it seems there are fewer states not suffering from a budget deficit, and as a result, states are finding more ways to maximize the number of sales and use tax revenue, including significantly increasing the audit workforce across the country. In short, auditing is easy money. Furthermore, not only are states adding to their audit divisions, but many of those newly hired auditors are setting up shop outside of their home state and auditing out-of-state businesses. With nexus legislation and use tax reporting requirements proving difficult to pass or enforce, it’s no wonder states turn to their audit professionals to save the day.

So, what do you do if you’re a remote auditor charged with bringing home the bacon? Easy: You target companies with an obligation to collect and remit your state’s tax, and you focus on the industries most prone to error when it comes to compliance. That list is shorter than you might think. According to a study Avalara conducted with Peisner Johnson & Company, nearly 60 percent of state audits are spread among just four or five industries: retail, manufacturing, construction, wholesale/distribution, and food service. This reality is the basis of the newest Avalara whitepaper, Sales and Use Tax Audits Uncovered: Who Gets Audited, Why They Get Audited, and the Impact on Companies.

As the whitepaper reveals, certain industries get targeted by auditors due to the nature of how they operate, like how food service companies are frequently audited because they’re cash-based and known to leave cash unreported. Beyond that, the primary reason these industries are targeted is that they historically fail to adhere to state and local sales and use tax regulations. In fact, according to the California Board of Equalization, the number one most frequent error of noncompliance made by businesses typically involves untaxed purchases from out-of-state vendors. Consequently, the data suggests that the bulk of audit assessments resulting from these errors came from use tax not being paid. And these are no small assessments: Avalara’s joint study also found that the average cost of an audit is approximately $114,000 including penalties, fees, and professional counsel. That’s quite a price to pay for something so avoidable.

Ultimately, when it comes to sales and use tax audits, the best offense is a solid defense. In the whitepaper, Sales and Use Tax Audits Uncovered, you’ll learn the most common audit triggers for each key industry, as well as how best to prepare and support yourself before or during an audit. Sales and use tax compliance may be tricky, but with the wealth of tools and information available today, business owners have never been in a better position to eliminate risk and safeguard themselves against a costly audit.

2017 Mid-Year Sales Tax Changes

Repost from Avalara

Dealing with change is standard operating procedure for many companies: employees leave and are hired; new products are introduced and old ones phased out; there are booms, and there are busts. On top of all that, companies need to account for sales and use tax changes. Significant changes in rates, regulations, and product taxability often take effect July 1, which is the start of a new fiscal year in all but a few states.

At the end of 2016, we shared many of the sales tax changes set to occur January 1, 2017. These included state sales tax rate changes in California and New Jersey, the expansion of sales tax to certain services in North Carolina, the prohibition of taxing more services in Missouri, and a bevy of recently enacted soda taxes and tampon tax exemptions. At mid-year, we’re seeing a few propositions that signify a dramatic shift in online sales tax revenue.

States want to collect more tax revenue from remote sales

Perhaps the most notable trend of 2017 is states’ push to obtain tax revenue from remote sales. This isn’t new. States have been working to tax out-of-state sellers for years, but their efforts have been hampered by Quill Corp. v. North Dakota, 504 U.S. 298 (1992) — the landmark Supreme Court ruling that a state can only tax businesses physically located within its borders.

In recent years, states have found creative ways to work around the physical presence precedent upheld by Quill. They’re taxing businesses with ties to in-state affiliates and those that generate a certain amount of business through links on in-state websites (commonly known as click-through nexus). Increasingly, they’re also taxing companies with a certain amount of economic activity in the state (economic nexus). Unfortunately for states in need of additional sales tax revenue, these affiliate, click-through, and economic nexus laws are difficult for states to enforce.

Therefore, many states are looking to different and more aggressive approaches. Two methods, in particular, have been gaining steam this year: use tax notification and reporting requirements, and taxes on online marketplace providers such as Amazon and eBay.

Use tax notification and reporting requirements

Colorado paved the way for states to impose use tax notification and reporting requirements on non-collecting out-of-state sellers. After spending years stuck in court, its policy takes effect July 1 — the same date a similar policy starts in Puerto Rico. Vermont recently passed one and made it effective retroactively, on January 1, 2017. Other states, including Pennsylvania and Texas, are considering use tax notification and reporting measures.

Sending annual reports of consumer purchase activity to consumers and state tax authorities is more work for remote retailers, and Colorado and the other states could be using their policies as a back-door approach to getting out-of-state companies to register and collect. Even if companies choose to not take that route, use tax reporting should help states increase their use tax collections.

sales tax

Taxing online marketplaces

Minnesota is the first state to enact a tax on marketplace providers. HF 1 will take effect at the earlier of July 1, 2019, or when the Supreme Court modifies its decision in Quill — though the effective date could change if Congress passes legislation allowing states to tax remote sales.

North Carolina, Texas, Washington, and a number of other states are also interested in taxing marketplace providers, and their efforts are likely to continue or resume as 2017 wanes. But not all agree it’s a good idea: New York lawmakers blocked Governor Andrew Cuomo’s attempt to tax them earlier this year.

Congress could tackle online sales tax

Federal lawmakers are much preoccupied with tax reform and repealing or revamping the Affordable Care Act. Allowing states to tax remote sales transactions, or definitively preventing them from doing so, seems to be low on their list of priorities. However, we’ve learned to expect the unexpected from Washington, so a federal solution to the problem of untaxed remote sales should not be entirely ruled out.

Two bills have been introduced that would authorize states to tax certain interstate sales: the Marketplace Fairness Act of 2017 and the Remote Transactions Parity Act of 2017.

A bill that would codify the physical presence standard set by Quill and further limit states’ ability to tax interstate sales has also been introduced: the No Representation Without Representation Act of 2017.

Other sales tax changes

Many of the trends seen at the start of the year are continuing as 2017 progresses. Florida has enacted a tampon tax exemption, Seattle a soda tax. Tennessee is lowering the state sales tax rate on food and food ingredients, there are calls to add a statewide sales tax in Alaska, and although he failed to achieve it this session, Governor Jim Justice has been pushing to raise the state sales tax rate in West Virginia. The taxation of services — including online music and movie streaming services — remains a hot and hotly contested topic. And, as always, a plethora of local sales tax rate changes take effect at the start of each new quarter.

Don’t be lulled into complacency during the dog days of summer: There’s a lot happening in the world of sales tax right now. Staying on top of these and other changes will allow you to prepare for them. Download Avalara’s 2017 Sales Tax Changes Mid-Year Update to learn more.

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4 Signs Your Growing Business Needs to Rethink Sales Tax

Repost from Avalara

What’s new with your business? If it’s any of the below, then congratulations are undoubtedly in order. And, while we certainly don’t want to put a damper on the wrap party for your latest launch, we do want to pipe in with a quick tax-wise nugget: New business growth often leads to new sales and use tax obligations.

When you’re busy growing and promoting your business, it’s easy for such obligations (known as nexus) to sneak up on you. But never fear. We’re here to help you better understand the potential sales tax implications of four of the most common — and exciting — ways your business may be expanding.

rethink sales tax

If you have recently or will soon engage in similar activities, it’s a sure sign that it’s time to rethink what nexus entails for your business.

  1. New products
    Adding new products to your lineup? They may be taxed differently from the items or services you already provide. Updating products may change the product taxability rules as well.For example, say you sell software. Traditionally you’ve focused on packaged software delivered on discs but are now expanding into digital downloads. The latter will most likely be taxed differently from the former. Be sure you understand the differences — and account for them in your tax reporting software — before your digital sales begin.Not only are there many nuances in how seemingly similar products are taxed, every state and jurisdiction does it differently. You may sell in one state where digital downloads are not taxed at all. In another state, they may be taxed at a different rate than their analog counterpart.
  2. New sales channels
    So you’re a brick-and-mortar business that’s going online or vice versa — it happens! You’re in for a world of sales and use tax changes. Online sales greatly expand your reach, and selling into new states may create nexus for you in those states. If it does, how will you calculate sales tax correctly given there are more than 12,000 tax jurisdictions in the U.S. alone?If you’re an online retailer setting up your first physical location, you’ll need to account for sales tax refunds when someone returns an online order in the store. These and a slew of other scenarios are best addressed in the planning stages to help minimize tax missteps from the outset.
  3. New go-to-market efforts
    You’re likely planning to make sure news about what’s new with your business travels fast. Say you’re an Illinois company planning to attend a New York trade show and launch an online advertising program in both New York and New Jersey. If you sell your products or services at that trade show, you’ll create nexus for yourself in New York. Moving forward, you’ll need to collect sales tax on all transactions to New Yorkers, and that includes online sales.Both New York and New Jersey are two of about 20 states with click-through nexus laws. So if those online ads lead to a certain amount of sales and commissions, you’re further expanding your nexus into New Jersey. (New York nexus was already established with the trade show sales.)There are other ways to create nexus, too, which is why it’s so important to conduct regular nexus studies — particularly every time your business tries something new.
  4. New relationships
    As your company grows, you make it a point to maintain the same high level of customer service you’ve had from the start. To do so — as well as to expedite order delivery — you may strike up a deal with a fulfillment center or a drop shipper. The former would store your inventory for you, packing and shipping products when a new order arrives. The latter would manage its own inventory, packing and shipping products you sell but don’t actually stock. Both can create new sales tax obligations for you.Fulfillment centers, for example, may disperse your inventory to various warehouses across the U.S. If you store inventory in a state, even through a third party, you typically have nexus in that state. With drop shipping, both your own nexus and that of the drop shipper’s may come into play.

Remember, if it’s new to your business, it may be creating new nexus for you. Activities like expanding your product line, advertising online, contracting with a drop shipper, and more can all have a positive impact on your bottom line. But if you don’t understand how they affect your sales tax obligations, the negative impact can be staggering.

An audit, for example, costs an average of $100,000, according to Wakefield Research. Just think if multiple states audit you in the same year, each fining you for not correctly identifying and/or managing your nexus responsibilities. It’s simply too much to risk. That’s why it’s better to address nexus as part of every growth initiative. If you plan ahead, you can oftentimes minimize trouble with nexus and audits. If not, you may soon realize that your business growth came at too high a price.

How does your growing business handle nexus?
Get your free copy of the Evolving for Growth whitepaper for more tips on evolving — and automating — your tax compliance as your business grows into new areas.

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When State Auditors Head out of State

Auditors are on the move. While most businesses expect (i.e., dread) to be audited by their home department of revenue, it often comes as a surprise to learn that state tax authorities routinely send auditors to, or hire auditors from, other states to capture unreported sales and use tax revenue. Some states go so far as to have remote offices.

For example, the Texas Comptroller has audit offices in Los Angeles, New York City, and Tulsa, Oklahoma. California has field audit offices in Chicago, New York, and Houston. There are Missouri Department of Revenue offices near Chicago, Dallas, and New York, while the Florida Department of Revenue has offices in Atlanta, Chicago, Dallas, Houston, Los Angeles, New York, and Pittsburg. The Utah State Tax Commission doesn’t specify where all it has sales and use tax auditors but notes that they “spend a majority of their time at taxpayers’ offices looking at detailed sales and purchase transactions” and “travel to locations all over the United States to perform their work.”

Field auditors employed by the Washington State Department of Revenue may audit businesses in multiple states. The Department divides the country into several sections: an Out-of-State North District (Eastern Iowa, Illinois, Indiana, Michigan, Minnesota, Ohio, Western Pennsylvania, and Wisconsin), an Out-of-State South District, and so on. Field audit offices develop and implement audit programs to optimize accurate tax reporting and payment by businesses located throughout the target area.

What do auditors in other states do?

Auditors frequently examine sales by companies that are headquartered in other states but have nexus (a connection strong enough to trigger a tax collection obligation) in the auditor’s home state. Yet a company doesn’t have to be registered with a state to be targeted by that state’s audit division. While many audits are selected by a random sampling of registered businesses, auditors knock on the doors of unregistered businesses whenever evidence suggests that they may owe the state tax revenue. This is true both in-state and out.

Many states have increased audits since the Great Recession, hiring new auditors as needed. New Mexico’s Audit and Compliance Division has added approximately 62 FTE employees since economy plummeted. And in 2015, the Wisconsin Department of Revenue announced that it needed 102 additional auditors and 11 additional agents to help uncover what was estimated to be approximately $80 million in unpaid tax revenue. Many of the new hires are focusing on businesses based in other states.

audit

States work together

In addition to sending auditors to other states, state tax administrators frequently work together. Regional information-sharing agreements between states, such as the following, can greatly help facilitate audits:

  • NESTOA, North Eastern States Tax Officials Association (Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, and Vermont)
  • SEATA, Southeastern Association of Tax Administrators (Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, Virginia, and West Virginia)
  • MSATA, Midwestern States Association of Tax Administrators (Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota, Wisconsin)
  • WSATA, Western States Association of Tax Administrators (Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Texas, Utah, Washington, and Wyoming)

There are other sorts of information-sharing agreements as well. New Mexico shares information with — and receives information from — three tribal governments. And the Multistate Tax Commission Joint Audit Program for member states “provides obvious economies of scale to the states” and “relieves the taxpayer of the burden on multiple ongoing audits.”

Oklahoma to base auditors in other states

Oklahoma doesn’t currently base auditors in other states. Like Utah, it sends auditors to various out-of-state locations as needed, and between 2014 and 2017, it conducted more than 460 audits of remotely based businesses. But a recently enacted law will soon enable the Tax Commission to develop a stronger presence out of state.

HB 1427 authorizes the Oklahoma Tax Commission to create and maintain an Out-of-State Tax Collections Enforcement Division. It enables the Commission to “employ full-time, unclassified, out-of-state tax auditors or full-time-equivalent contracted auditors” to enhance the following:

  • “Sales and use tax collections related to sales or transactions involving residents of Oklahoma and out-of-state vendors with a nexus to the State of Oklahoma”
  • “Collections of any other unpaid taxes owed the State of Oklahoma by out-of-state individuals, firms, and corporations”

The Tax Commission may audit any individual or business it believes may owe tax revenue to Oklahoma. The law takes effect November 1, 2017.

How would your business fare during an audit?

Get your free copy of the Sales and Use Tax Audits Uncovered report to learn more about audit triggers, how to avoid them, and how to protect your business against unnecessary tax compliance risk.


Permission to reprint or repost given by Avalara. Content previously published at www.avalara.com/blog.

Growth Activities That Can Be Life (And Tax) Changing

Growth isn’t a one-size-fits-all approach. In fact, companies expend a great deal of energy and resources deciding which pursuits will move the needle the furthest toward achieving specific goals, and where to prioritize their time and investment.

Oftentimes sales and use tax gets left out of this equation, especially when it doesn’t appear to directly correlate to the task at hand. Certain growth activities, like adding new locations, products, or sales channels, instinctively signal a need to alter sales and use tax compliance practices. With others like financing rounds, acquisitions, or technology platform changes, tax implications aren’t as obvious and therefore are more likely to be overlooked. Yet these are often the situations where compliance strategies can have the greatest and most lasting impact.

growth tax

Below is a brief glimpse of how sales and use tax compliance can come into play for 3 business growth activities that can be life (and tax) changing: financing events, M&A, and technology platform integration projects.  Here’s what you should be aware of when going through these processes.

Financing events

For any financing event, public or private, investors look closely not only at how you plan to grow the business, but also how you are managing it now. Poor sales tax management practices or unfavorable audit outcomes can impact valuation, jeopardize funding, or even nullify deals. High visibility events like funding rounds and IPOs can also bring your business to the attention of state auditors looking to draw in more tax dollars.

Mergers and acquisitions

The meshing together of people, assets, systems, and processes is no simple feat. So, it’s not surprising that business integration issues following M&A transactions are one of the biggest things keeping company execs up at night.  Between due diligence, integration, accounting/financial reporting, and post-acquisition compliance, who has time for the minutia of sales tax? It can be easy to overlook tax obligations or liabilities, which can raise red flags with investors early in the process, or with auditors later.

Technology platform changes, consolidations or upgrades

During change events, it’s good practice to evaluate your financial systems and fill any gaps with new solutions or functionality that can advance your growth objectives. For example, tax automation software that unites critical transaction data from disparate systems and processes can alleviate compliance issues during post-merger integrations, reducing audit risk and avoiding delays in closing the books.

Download the complete whitepaper for further insights from leading industry leaders.


Permission to reprint or repost given by Avalara. Content previously published at www.avalara.com/blog.

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