Small to Medium-Sized Businesses: Know Your Sales and Use Tax

By Diana DiBello, Director of Customer Support

Does your business understand its requirements for collecting sales and use tax in all the states where you do business? 

Why should mid/small market companies be concerned about sales tax? Companies are required to collect taxes in most states where they do business. It’s just an invoice amount times the rate, right? It becomes more complex when you throw in the need for sellers to determine nexus and make sure the correct rate is used. Businesses using ERP systems often fail to ensure that their tax calculation and returns processes are handled properly. When handled improperly, not only does it expose the company to assessment and audits, it causes unhappy customers.

According to 2013 data from the Census Bureau, the various impositions that fall under the sales tax category account for about 45% of states' revenues nationally. Some states like Florida and Texas rely heavily on their transaction tax revenue. Florida is over 80% and Texas is over 75%. To minimize the risks and avoid the sales tax audit, compliance issues must be addressed by companies with a requirement to collect sales taxes. It is likely that most companies are filing returns and paying their fair share but many taxpayers struggle with complex state by state requirements when it comes to sales tax.

Companies first need to determine if they have a requirement to collect tax. This is called nexus and refers to the connection a company may have with a jurisdiction that allows the jurisdiction to require the company to collect sales tax. This hurdle can be minimal and is often a topic of debate between the jurisdictions and companies. Many taxpayers make the mistake of using income tax nexus standards for sales tax nexus determination (PL 86-272.) The barrier to jurisdictions to require sellers to collect taxes is easily met by having employees soliciting in their jurisdiction or owning property in their jurisdiction. That doesn’t even begin to look at the latest trend in states attempting to lower the hurdle even more with “click-thru” nexus laws aimed at requiring on-line retailers to collect the tax.

Figuring out what rate to charge can be confusing. In many states, local jurisdictions can each assess a sales tax in addition to the state rate. For example, Missouri has approximately 2,000 local tax rates. The ability to monitor the rates and changes to rates is a challenge for many companies who do not have a dedicated tax resource(s) for this job. In addition, some states have a different rate depending on what type of tax is collected. In most cases the rate is used is based on where a product is delivered. However, there are still 10 states that source local taxes on an intrastate transaction where products are shipped to the purchaser to where the retailer is located or in other words where the sale originates.

The key lesson learned is that sales taxes can be very complicated especially for companies that do business in multiple states but have limited resources to support the sales tax management activity. New sales and use tax software from Vertex Inc. is available to lessen the burden and make it easier to comply.

1. Impositions included: General Sales and Gross Receipts Taxes, Alcoholic Beverages Sales Tax, Amusements Sales Tax, Insurance Premiums Sales Tax, Motor Fuels Sales Tax, Pari-mutuels sales tax, Public Utilities Sales Tax, Tobacco Products Sales Tax, other selective Sales and Gross Receipts taxes.
2. There are 12 states with some form of Origin based sourcing: Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah and Virginia.