A Noble Cause: Mitigating Sales Tax Exposure Risk

Some businesses make the mistake of putting off investment in tax compliance because it seems too expensive. But when it comes to sales tax compliance, the old adage is true: an ounce of prevention is worth a pound of cure. Putting a plan into action to handle sales tax exposure risk can seem like a daunting task. In reality, it is easier to get started than you may think. And the benefits of being in compliance go beyond getting a good night’s sleep.

Unpaid sales tax liabilities add up quickly over time. What’s worse, the individuals who own and manage your business can be held personally liable if the business does not pay the taxes due.

The cost to remediate sales tax issues is exponentially greater than the cost of on-time sales tax compliance. Costs of non-compliance include:

• Late filing penalties
• Late payment penalties
• Interest charges
• Uncollected sales tax
• Unnecessary state tax audits
• Consulting fees

Being out of compliance not only costs money, but it can also affect your business in other ways. For example, if you are looking to raise new rounds of capital investment or sell your business, having a clean bill of health for sales tax compliance is essential to complete the transaction. Deficiencies in this area can lead to holdbacks to cover sales tax exposure, and if the sales tax liability is large enough, it could even kill the deal. 

Have You Had a Sales Tax Nexus Review?

Now that the 2018 SCOTUS Wayfair v. S.D. (Wayfair) ruling on economic sales tax nexus for remote sellers is fully in effect in most states, businesses that have yet to come into compliance could find they have a material tax exposure going back several years. Even if you are only selling products wholesale or if sales tax is not due, you may still be required to register and file returns to meet the state’s minimum economic activity threshold and reporting requirements.

Each state with a sales tax now has its own economic nexus rules on top of their rules for establishing nexus physically. The majority of states have adopted Wayfair’s threshold of $100,000 of sales or 200 separate transactions in a year. This is a good rule of thumb to use when performing a quick analysis of your state-by-state sales tax compliance and exposure. Please note, this limited analysis should not be substituted for a full multistate nexus review which is needed to accurately determine where and when you should have been filing returns. 

In most states, the statute of limitations for sales tax is three or four years. Statute of limitations simply means the historical period of time that a tax jurisdiction can look back to audit or review your business’ tax compliance with that particular jurisdiction. This is great because once that time period lapses the filing period is no longer available for audit or assessment by the state. The catch is that the statute of limitations is applicable only if a return has been filed for the period. This means that if you have sales tax nexus, and have not been filing your returns timely, those unfiled periods could remain open for audit, indefinitely. This can leave you and your business open to future assessments, even after you leave the organization or if the business closes. 

State Income Tax Nexus vs. Sales Tax Nexus

There is another reason it is a good idea to perform a detailed sales tax nexus review. 

Although filing a state income tax return is not an absolute indicator that you have sales tax nexus in a state, it is a clue that further review is needed to determine if you do have a reporting obligation.

Sales tax nexus is created through physical presence of employees, offices, or inventory located in a state, or via a minimum level of economic activity in a state. In some cases, sales tax nexus may be created for a state even though income has not been apportioned there on your state income tax returns.

Questions to Get Started

Consider these general questions as you evaluate your tax compliance situation:

When was the last time you had sales tax nexus review completed? If it has been over a year, now is a good time to take this review. States evaluate economic nexus on a calendar year or 12-month rolling basis. 

Have you performed a taxability review for your products and services? Knowing how to properly tax all of your products and services is important to ensuring you are collecting and remitting the right amount of sales tax. 

In what states are you filing sales tax returns? Comparing your sales tax filing calendar to where your sales are going is a healthy exercise that will bring to light where you may need to register and file returns.

Are you aware of any unresolved sales tax issues? The longer you wait to resolve a sales tax issue the more expensive it is to correct. 

Key Pieces of Information You Will Need

The following information will help facilitate timely compliance.

Sales by State – Comparing sales-by-state to the current filing calendar can reveal potential compliance exposure. Sales of over $100,000 in any state where you are not registered for sales tax is a potential red flag that should be reviewed. Sales of any amount in a state where you have physical presence typically creates sales tax nexus.

Sales Tax Accruals – Accruals that are not for the current periods are an indication of a previous shortfall of sales taxes collected. It’s important to understand what measures have been taken to mitigate the exposure going forward. If the business hasn’t yet taken steps to remediate, then it is likely the same issue is still occurring. 

Sales Tax Filing Calendar – This is a great tool to help manage your filing requirements. It helps you track where you are filing returns, and more importantly, where you are not filing returns. 

Income Tax Apportionment vs. Sales Tax Filings – Although there are acceptable reasons why revenue would be apportioned to a state for income tax purposes, with no sales tax registration in that state, you should not assume you are in compliance. Performing a sales tax nexus review will help you know if you need to register for sales tax in those states. 

Employees Located Outside of Your Home State – Employees create physical presence nexus for your business and potentially a filing requirement, especially if they are sales and marketing employees. Comparing staff locations in states where you have revenue to the sales tax filing calendar, can reveal gaps in your sales tax registrations. 

Offices and Inventory Located Outside of Your Home State – Facilities and inventory located in other states can create physical presence nexus for sales tax purposes. This combined with sales into the state, creates a requirement to register and file sales tax returns. For example, do you utilize fulfillment by Amazon or another marketplace facilitator to house your inventory. Where is that inventory located? 

Weaver’s SALT team can help you assess your sales tax compliance situation and provide guidance on how to most efficiently remediate any exposure. Contact us today for assistance.

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