Our firm partners occasionally with one of the leading providers of automated sales tax solutions – Avalara. They’re a team of tax and software industry veterans who’ve created a very cool cloud based solution for managing business’ sales tax and exemption complications. If your firm sells into many different states or taxing districts, their solution can help you manage the process and more importantly, stay compliant. States make a lot of money dunning small businesses for not being compliant, and so Avalara has built a very successful niche.
Today, we’ll reprise 7 best practices they recommended in a recent white paper you can also find here.
1. Know where you have nexus. Nexus means that a business must collect state sales tax if it has a substantial physical presence in a state. Recently, nexus laws have expanded to include distribution, independent agents, remote employees and affiliate networks. Be certain you understand where you are required to collect tax and keep up to date on nexus changes to protect against non-compliance penalties.
2. Keep up with product and service taxability changes. Most sales of Tangible Personal Property (TPP) are subject to tax. This has begun to shift to include intangibles, with many states now routinely apply sales taxes to certain services. Keep apprised of product and service taxability as rules evolve and adjust your accounting systems and taxing practices accordingly.
3. Use the right tools to get the right rates. It’s common for businesses to shortcut researching sales tax rates by using ZIP code tools. Unfortunately, taxing jurisdictions don’t always follow ZIP codes. Tax rates can vary even within an individual ZIP code and counties and municipalities can levy sales taxes in addition to state rates. Geospatial mapping (the same technology as Google Maps), is more accurate and can calculate sales tax “down to the rooftop.”
4. Efficiently manage exempt sales. Not all customers are required to pay sales tax. Depending on the rules in a taxing jurisdiction, certain businesses and individuals may be exempt. If you’re the seller, it is incumbent on you to collect valid exemption certificates, keep them on file and track their expiration and renewal dates.
5. Know where and how to remit sales tax. Businesses must using correct forms and formats for each jurisdiction and meet filing deadlines. This can get complicated with multiple locations and nexus, exponentially upping the odds of missing a file date, rate change or certificate renewal date and increasing non-compliance and audit risk.
6. Be audit ready. The most critical action you can take to pass an audit is to collect sales tax properly over time and ensure that you have properly documented every step of the transaction. Audits are much less painful when transaction history, exemption certificates and other relevant information is readily available. If your practices, calculations and records are in good shape, you should be too.
7. Streamline your process. Outsourcing and automation are efficient, cost-effective alternatives to manual processes. Look for a cloud provider that integrates with your accounting, point-of-sale, ERP or ecommerce system and offers a full suite of transactional tax services—calculation, fi ling and handling of exemption certificates. Of all the best practices outlined above, this last one—outsourcing tax compliance —gives you the best return on investment by pretty much taking care of the rest.