Your business is growing. You’ve added some new employees, some of whom may even work outside the traditional office setting. Your distribution has expanded and your products are reaching new customers every day. Since each state you do business in has different tax requirements, now is a good time to check for a new sales tax nexus and taxability laws. Once you find a new nexus, review that state’s sales tax laws for accurate calculation and filing information.
Here are some tips on taxability and sales tax nexus in 2015:
Sales Tax Nexus
Each state has different laws and those laws change frequently. Internet sales that used to be free from tax requirements are now being taxed. For example, this year, Amazon and its vendors will owe taxes to over half the states where they do business. The days of tax-free online shopping are coming to an end across the country. The details are also getting trickier. In some cases, even web advertising that leads to sales in another state can create a nexus for your company!
- Is E-file a Payment Option?
Payment options vary from state-to-state. Companies are required to pay taxes electronically in some states such as California, Connecticut, New Mexico and North Dakota while other states aren’t set up for electronic payment at all. Once you learn which states your company has a nexus in you can check that state’s requirement and payment options. To find information on a certain state, or visit Avalara’s State Sales Tax Map
- Prepayment Obligations
Much like your e-filing and other taxability details, your prepayment obligations vary from state-to-state. For your new nexus, be sure to look at pre-payment options and requirements. If you owe substantial taxes, some states require special payment plans. Prepaying schedules often differ from standard filing times. Some areas even require filing with a higher frequency than others do, as often as once a month! The more jurisdictions you do business in, the more likely it is that you will have to keep track of multiple filing schedules.
- Reconcile your Taxes Payable
For each new nexus you will need to reconcile your accounts. Use accounts payable, invoices and receipts to stay current on taxes owed. To do this, take your account balance at the start of the accounting period and add the total amount billed. Then subtract the amount of total sales and use taxes paid. Reconcile this amount with your current sales tax payable account balance. Any remaining discount or rounding balance can then be added to the correct general ledger account. If you use financial packages, you probably already realize the importance of real time updates and reduced hardware and implementation costs. Just be sure, if you’re using cloud-based financial services, that you are getting the most out of it. You can do this by employing both a fully automated and an integrated cloud-based sales tax solution. Fully using these services makes reconciliation easy and accurate.
Check your Checks
Do not assume checks to the Department of Revenue have cleared your bank. A misplaced notice from the bank or the DOR can leave you with an outstanding sales tax balance. Set up a system for handling incoming documents and review it with your staff. Better yet, utilize e-payment and e-filing to keep track of payments. Going electronic will help reduce the chance of an important notice being buried in a pile of paperwork and forgotten in the corner.
- Check filing dates. They can change.
Do you know when your filing dates are for each nexus? Are you sure? Several states, including Colorado and Wisconsin, have recently issued new filing frequency requirements. Now is a good time to review your sales use tax calendar and update it. Be sure the filing date for each nexus is on the calendar. When filing dates change, states usually send out notices several months in advance, but don’t wait on them! Filing date changes apply whether or not you receive a notice, and with filing frequencies changing all the time, it’s best to take the time to verify.
- New Product
Got new products? What’s the taxability on them? New products might equate to new taxability requirements or exemptions. Review the regulations that apply where you plan to sell your new product. Be aware that exemptions and taxability laws vary from state-to-state. If you have a nexus in a new jurisdiction, review the sales tax law. Taxability also changes if your product is cloud-based or digital. For example, the taxability of products like movies, software, and music has drawn the attention of states that are frantically looking for new sources of revenue. It may be worth reviewing these product-based tax laws before you add new items to your line-up.
- Exempted Customers Be sure all customer exemption certificates are up-to-date and on file, especially those in your new nexus. If a customer’s exemption certificate has expired you will need to make sure their exemption is renewed and on file. Otherwise, you may have to start charging the customer sales tax. If your company has changed names or is expanding into a new jurisdiction you may need new exemption certificates from each customer. Since invalid or missing exemption certificates are one of the leading causes of audits, you may want to consider hiring professionals to reduce this risk. An automated service from experts like Avalara ensures certificates stay current, accurate and complete.
- Never Miss a Notice. You’ve done the paperwork, checked your nexus, filed, and paid on time. Now… you can relax. But wait, have you checked your notices? Even when you do everything correctly, things can go awry. The jurisdiction that’s processing and filing your returns may not have read the details right. Like the postmark. Or if you have multiple accounts perhaps the payment got credited to the wrong one. If something like this happens, you will receive a notice. Be sure you respond to any notices in timely manner to avoid penalties like a levy on your bank account, a lien on the corporate officers, or suspension of your business license! Even if it was not your mistake, it won’t be resolved until you respond to the notice. Don’t neglect notices!
- Jurisdiction Accuracy
Figuring out your taxability in a new nexus can be complicated. At one time, using zip codes was accurate enough. However, in today’s evolving market, using only the zip codes may not be accurate enough and you might miss area specific exemptions or miss a special district tax, causing huge penalties, audits, and return reconciliation.
Sales tax rates have several layers: state, county, local and special district taxes. Your total, or combined, sales tax is actually the sum of those taxes. It’s quite common to have several different sales tax rates within one zip code. Zip codes don’t specify exemptions at a specific address. Your nearest neighbor may have a different tax rate than you. Using only zip codes to calculate taxability may cause you to apply incorrect rates and even remit sales taxes to the wrong jurisdiction. Thanks to today’s technology it is easy to avoid problems. Using latitude and longitude coordinates will pinpoint your transaction and accurately identify your jurisdiction. Using geo-location for your transactions will assure accurate taxability information.
Oh No! An Audit!
In today’s economy states are struggling to balance their budgets. Auditing is one method they are using to try to find unpaid taxes. This means your chances of being audited have probably increased. Audits are stressful, time consuming and a drain on your business resources. There are things you can do to prepare yourself for an audit. Being ready is half the battle. Review your records now and pay special attention to these areas:
* Keep your ledgers accurate and up-to-date. The auditor might want to view Accounts Payable (A/P), Accounts Receivable (A/R), General Ledger (G/L), and Federal Income Tax Returns (FITR). Any related records can be reviewed also such as purchase orders (PO), paid bills, invoices, contracts and customer exemption certificates.
* Make your documentation easily accessible. If you have the documents mentioned above readily available, the auditor likely will notice your cooperation and be appreciative. It will also require less of your staff’s time if these files are already organized and in place.
* Show the transaction trail. The auditor must be able to follow and match up all documents related to each transaction. Be sure you have items like charge backs or returns sufficiently documented. If the auditor observes that you have the ability to easily produce the documents they need to see, you can save yourself from incomplete or incorrect documentation penalties.
- Consider Automating
Is choosing an automated sales tax services a smart choice for your business? Consider your overall goal. Sales tax collection doesn’t turn a profit and it uses resources that could be earning revenue. However, tax automation can save you the time and stress of having to keep your own records sorted out. It will also save your business if you are ever audited. Finding a nexus, researching your product taxability, keeping track of filing frequencies and exemptions for each jurisdiction and staying up-to-date on documentation and filing requirements reduces efficiency by taking valuable time you could be devoting to your business. An automated sales tax software like AvaTax, reduces audit risk with sales tax services that calculate sales tax rates and new nexus taxability obligations, manage exemption certificates, files forms, and remits payments. If you want to maximize your business efficiency and minimize the risk of an audit cloud-based, tax automation services can help.
Do you have more questions about taxability or sales tax nexus? Please let us know in the comments below!