Successful businesses are always looking for ways to increase profits by increasing sales or reducing costs or both. One of the most significant (and often overlooked) costs of doing business today is managing the collection and remittance of sales and use tax. Prudent and proactive businesses are constantly investigating and implementing new methods to reduce their sales and use tax audit liability and increase staff productivity. It can be a formidable challenge especially for small to medium size companies, including start-ups, that are taking advantage of expansion opportunities but don't have the manpower or the sophisticated financial systems to handle the expanded tax responsibilities that go along with their growth. With rapidly increasing complexities of sales and use tax, companies can or may fall behind which can result in serious consequences - from inaccurate collection or payment of tax to the possibility of an audit assessment by state or local agencies. Currently, these issues are particularly pressing for the following three reasons:
- Consequences of Growth: Expanding into new product offerings can quickly multiply the complexities of sales and use tax management. Taxation rules can vary widely even for similar product types;
- State-by-State Nuances: Ecommerce and the use of third-party warehouse and fulfillment services simplify expansion to new markets but they can quickly complicate tax calculations, making it difficult to clarify exactly where nexus exists;
- Audit by Automation: Virtually all states are experiencing significant drops in revenue and increased demands for state services. To increase revenues, states are being very aggressive in their sales and use tax audits using big data-style analytics and automated solutions, as well as employing third-party companies that are paid a percentage of taxes and fees collected. Also, many States have begun to urge Congress to redefine nexus as attempts to level the playing field between online merchants and merchants who own brick and mortar stores.
Risk management related to sales and use tax is an extremely important but complicated process. Effective management requires understanding geographically varied laws, tax collection, reporting, remittance, and recovery. Unfortunately, in today's regulatory and business environment, even companies that track and update changes in sales and use tax rules, boundaries and rate changes often fail to remit their liability correctly. Knowing which form to use, where to file, and what to include in the returns is not simple and requires extensive time to research. Additionally, these processes are expensive. Not only is there the risk of the cost of audits and the opportunity cost that is spent when employees are taken away from other tasks, but the actual dollar amount that is attributable to the cost spent on employee wages when they are performing these tasks is substantial. Some of the main tasks of tax management include:
- Managing sales and user tax requirements;
- Researching nexus status;
- Research product taxability rules within each state;
- Managing customer exemption certificates;
- Internal time spent responding to auditor requests and managing the audit process;
- Tax return preparation and filing;
- Administration of taxability changes;
- Management of documentation
Complying with sales and use tax regulation is not an option and thus the modern approach to tax management has evolved to either outsourcing to a third party CPA firm like Kakimoto & Nagashima LLP or implementing a tax management system that would be aligned with the company's ERP system. At Kakimoto & Nagashima LLP, we can advise our clients in a variety of areas such as:
- Sales tax compliance;
- Tax registration service;
- Determining nexus;
- Preparing Voluntary Disclosure agreement;
- If necessary, assume the entire tasks for sales and use tax compliance.
For clients that prefer to keep the task in-house, one option is to automate the process. Even under this option, we can assist our clients in selecting the appropriate solution, advising on ideal process and controls and assisting in the project of transforming the data for use in the automated system. Technology solutions along with project assistance to implement them can help ensure that the client's sales tax returns are accurate and reduce the risk of an audit. More importantly, it can also improve the efficiency of the client's business operation and its effectiveness in dealing with customers.
Companies want to pursue new avenues of growth, whether that involves reaching new consumers, expanding their product line or selling through a new market channel (i.e. ecommerce). Yet, each of these growth paths is accompanied by sales and use tax implications that the Company may not be able to handle as the modern regulatory and business environment have made managing sales and use tax more difficult than it has ever been in the past. That said, companies must do all they can in order to ensure that the burden of tax management is as little as possible while maintaining accuracy and compliance. For these reasons and to focus on tasks that can have a more direct impact on business decisions and results, proactive companies have been either outsourcing and/or automating its workflows. At Kakimoto & Nagashima LLP, we have professionals that are experts in the field of Sales and Use Tax and have extensive experience in assisting our clients from compliance advisory to tax system implementation. If you have any questions related to Sales and Use Tax and our related services, please contact your account professional or the office at (310) 320-2700.