Sales And Use Tax Compliance Tips For Firms
Looking to offer your clients more in-depth advisory services when it comes to sales and use tax? These are some key tips to get started.
The ever-changing world of sales and use tax (SUT) can be confusing to navigate, especially after the landmark South Dakota vs. Wayfair case changed how sales tax is collected and remitted in the United States. Accountants that take the time to understand SUT laws can better serve their clients and help minimize the risk of fees and penalties that could result from non-compliance. Here are some of the basics of any SUT specialization or service line.
1. Understand the Difference Between Physical Nexus and Economic Nexus
The 2018 Wayfair ruling drastically affected sales tax and set the stage for states to tax remote sales based on economic nexus. Now, having a physical presence in a state is no longer the only qualifier for collecting sales tax. This means that even if a business doesn’t have a physical location in a state, they still have to pay sales tax if they sell remotely to people who live in that jurisdiction.
Accountants should thoroughly understand the difference between physical nexus and economic nexus, especially if they work with remote retailers or companies that sell digital products. Not knowing if a client should be paying sales and use tax in a jurisdiction could be doing them a disservice. Companies that don’t comply with each state’s sales tax laws could end up getting penalized or fined, even if their non-compliance is accidental.
Once the difference between physical nexus and economic nexus is understood, the next step is to have a conversation with clients. It’s important to determine what clients do and don’t know about nexus laws and then make tailored suggestions to help them avoid future tax liability. Talking with clients is an essential part of helping them with SUT compliance.
2. Stay Up to Date On Nexus Thresholds and Standards
After the Wayfair ruling, the threshold that determines whether or not a business has economic nexus in a jurisdiction changed. Depending on the jurisdiction, economic nexus can be established either by having a certain number of transactions in a state or exceeding a dollar amount of revenue from sales in that state. For example, most states follow South Dakota’s economic nexus threshold, requiring remote sellers with sales of $100,000 or more or over 200 separate transactions to remit sales taxes. Some states have alternative thresholds that are liable to change every year.
It’s easy for businesses to get confused about whether or not they should be paying taxes, especially since so many businesses now sell remotely to people all over the country—and the world! The best way for a company to be sure about its nexus status is to work with an accountant or tax advisor. Accountants should provide their clients with the most up-to-date information on nexus thresholds to help them be SUT compliant. They can either do this the hard way, by manually checking every state’s threshold on a recurring schedule or the easy way: by using technology to navigate changing standards.
Solutions to time-consuming work have only recently become available, and accountants are starting to realize the scaling potential of automated sales tax analysis. For example, LumaTax has developed tools to estimate clients’ potential exposure and, if needed, perform a full nexus analysis. Users can securely complete a profile and upload transaction data. LumaTax will automatically normalize and consolidate the data—and validate it—flagging missing information and incomplete transactions. In the end, LumaTax provides a comprehensive nexus analysis report that is ready to share with clients.
3. Provide Registration Assistance
Once it’s been established that a business has reached an economic nexus in a state, the next step is often registering to pay taxes. Registration seems simple in theory, but it's one of the most daunting and cumbersome tasks for clients. The key is differentiating between timely and untimely registrations, but each state defines “timely” differently. Some states require businesses to register the day they exceed the economic nexus threshold, while others allow a grace period of 30 to 90 days or longer.
LumaTax makes this an efficient process for accountants and their clients by offering a tool to register for the required permits. For this step in the process, it's crucial to understand the intricacies between sales tax, sellers' use tax, vendors' use tax, excise tax, and other transactional taxes. It's also strategic to establish filing frequencies that reduce the expense to clients. Leveraging the expertise of LumaTax allows this process to become a seamless and efficient operation.
4. Offer SUT Advisory
The Wayfair decision created unparalleled opportunities for accounting firms to offer SUT advisory to their clients. Few businesses selling their products and services online understand post-Wayfair economic nexus rules or have the capacity and capability to manage their sales and use tax compliance. If their accountant isn't performing a sales tax review and handling reporting and compliance for them, they may mistakenly assume it's not an issue—until they receive a nexus questionnaire from a state in which they don't have a physical presence and haven't been collecting sales tax.
LumaTax makes it easier to manage sales tax obligations for accountants and their taxpaying clients. Don’t refer clients to other firms that already offer comprehensive SUT advisory—use LumaTax to build up in-house expertise and create a high-level service line dedicated to sales tax.
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