While income taxes only need to be prepared once a year, with additional compliance tasks including making estimated tax payments, sales taxes can be much more persistent an issue. Added to this is the complexity of keeping up with more than 10,000 taxing jurisdictions, many with special rules, and demanding reporting requirements that vary between monthly and quarterly in different states, and may also depend on the sales volume of the businesses.
Before the expansion of ecommerce, sales taxes were not that complex for most small businesses. But as the definition of nexus evolves to include even micro businesses that have an affiliation with Amazon and other online retailers, the collection, reporting and payment of sales taxes has grown from a few jurisdictions to potentially hundreds or thousands. Most small business owners simply don’t have the time, not to mention the knowledge, to manage these processes themselves, or to properly do so, leaving them vulnerable to a wide range of penalties.
So, instinctively, they turn to the same professionals who handle their income taxes and financial reporting:
Small businesses want to trust their accounting firm to manage their sales taxes, too.
Your clients need it.
As noted above, there are thousands of sales tax jurisdictions in the U.S., and even small businesses are now very connected with customers across the country, and around the world. Your business clients may be experts at what they do, but they probably aren’t experts at sales tax compliance, which leaves them vulnerable to costly mistakes in reporting, collecting and remitting sales tax revenues. This can leave then susceptible to very costly penalties.
Most common mistakes:
- Not filing and remitting sales taxes when due. Most states require monthly or quarterly filing, depending on sales volume. Keeping track of due dates is critical to avoiding penalties.
- Financial errors: Incorrectly reporting sales and tax collections is most common in states that require subjurisdictional reporting, such as by county.
- Assessing incorrect tax based on customer location: Online sales or deliveries subject to sales tax at the recipient’s location can be tricky.
- Assessing incorrect tax based on taxability of item: Some goods are taxed, some are not. Some are subject to thresholds. Some foods are taxable prepared, while not taxable if sold unprepared. Taxability varies greatly in different states.
- Being unaware of nexus, and reporting requirements: Does the small business sin Oklahoma need to collect and report taxes on sales to a customer in Wyoming? It depends.
- Failure to maintain accurate and valid exemption certificates. For businesses with sales to resellers or exempt organizations, certificate management is crucial.
- States are getting more active on compliance.
As most state continue to see their budgets come under pressure or decline, they are increasingly looking at sales tax enforcement. This means increased audit staffs and heightened scrutiny of sales tax returns and receipts, particularly exemption certificates. More states are also sending their sales tax auditors outside of their state’s borders, with Texas opening audit offices in California, New York and Tulsa, and Missouri opening offices in Chicago, Dallas and New York. Several other states have followed suit. https://www.avalara.com/blog/2017/05/17/states-move-auditors-state-wacky-tax-wednesday/
These auditors often work under reciprocal agreements with the local authorities to examine sales records of businesses headquartered there but conducting sales in their states.
Your firm can benefit.
Commoditization of traditional tax preparation services has resulted in lower profitability from that service, causing many firms to look for new revenue channels and more profitable consulting opportunities.
Adds revenue channel -- Sales tax services can offer a much-needed client service, providing them with the assurance of compliance in this complex area, while adding a steady, year-round recurring revenue stream that can balance cashflow for the firm. These services, with use of an automated sales tax compliance and reporting system, can generally be conducted by paraprofessional or junior staff at the firm, enhancing profitability.
Strengthens total relationship – Accounting firms are already their clients’ most trusted business advisors, and sales tax services result in ore frequent client touch points, which reinforces this client relationship. The increased interaction with client financials also results in greater firm knowledge of the client’s financials, which can strengthen other financial and planning services, while providing opportunity for additional consulting engagements.
Strengthens total relationship – Accounting firms are already their clients’ most trusted business advisors, and sales tax services result in more frequent client touch points, which reinforces this client relationship. The increased interaction with client financials also results in greater firm knowledge of the client’s financials, which can strengthen other financial and planning services, while providing opportunity for additional consulting engagements.
Sales taxes are more complex than they seem and getting more so.
Even a small brick-and-mortar retailer may face sales tax complexities, particularly if they process sales that are shipped to other states or jurisdictions, or if they offer delivery. In some states, services are also subject to sales taxes, and even wholesalers and other businesses may face use tax reporting requirements.
And that’s just the tip of the sales tax iceberg. Sales taxes in states and municipalities across the country frequently change, as new rates take effect or are phased out. There are also periodic sales tax holidays, such as for back-to-school shopping or disaster preparedness, during which some items are exempt from sales taxes, or are exempted up to a set threshold.
Even more challenging, some of the same items are taxed or exempted in different states, such as prepared foods, toiletries and snack food items.
Even if your business clients are in states without statewide sales taxes (AK, DE, MT, NH and OR) may face local taxes, not to mention their compliance responsibilities if they sell to customers in other states, such as online sales.
Managing Your Clients’ Sales and Use Taxes
More than just filing sales tax returns
Sales tax compliance services involve not only the end product returns, but also a full array of subservices, including sales tax consulting, where the firm helps determine a client’s risk of audit, their nexus areas, state registration requirements, assessment of amnesty programs and taxability issues. Additionally, the firm’s services can prove vital in the event of sales tax audits.
Automation is the key to productivity and compliance
While sales taxes are a complex issue, there are accountant-focused tools that streamline the processes involved and help accountants provide oversight of compliance functions. For smaller clients, cloud-based systems like the accountant version of TrustFile make it easy to manage the sales taxes of multiple clients, across all states and other jurisdictions they need to report to.
For clients with higher sales volumes and more complex sales tax compliance needs, the cloud-based AvaTax system plugs into their sales platform to automatically assign appropriate sales tax rates, and then prepares monthly and quarterly returns, as necessary. Avalara automatically maintains all sales tax rates and special treatments, and guarantees the calculations.
Similar to payroll services
After facing major competition from outside payroll service providers, accounting firms have been taking back their client payroll relationship. In many ways, the sales tax service scenario is similar.
With payroll, the firm sets up hourly wages or salaries, as well as tax and third-party withholding, then manages the processing, reviews related financials, and files wage returns and remits withheld taxes at the end of the year. With sales tax services, the firm oversees the financials related to sales tax collection and reporting, then ensures timely filing of returns and remittance of sales taxes. In both cases, the right technology streamlines the processes, leaving the firm with mostly a review and assurance role.
Just as they’ve done with payroll services, accounting firms should get in front of this continuing small business challenge by helping their clients employ a solution that automates their sales tax processes. Doing so provides business clients with a much-needed service, highlights the assurance and consulting role of the accounting professionals, and can be a profitable revenue stream for the firm.Last modified on Monday, 05 February 2018