By Will Frei, Sales Tax Specialist, Avalara
Most businesses are unaware of the compliance muddle that exists somewhere between sales tax compliance and overt negligence. This is the sales tax danger zone.
With 11,000 tax jurisdictions in the U.S. and thousands of sales tax rate and boundary changes every year, getting sales tax right is nearly impossible for businesses that don’t have the right process. For this reason, a great number of businesses find themselves out of compliance with sales tax rules. Some simply don’t realize they are out of compliance. Others don’t have the resources to fully comply.
What makes the danger zone so dangerous?
If a business is out of compliance with sales tax statutes, they are at greater risk of incurring penalties in the event of a sales tax audit. This is no small matter given that the average audit costs small and medium businesses $20,000 to $30,000.
Other factors also contribute to the danger zone: states hungry for revenue after the recession are aggressively targeting businesses in the sales tax danger zone with more audits.
· T The New York Department of Taxation is comparing consumer debit and credit card purchase data to retailer sales tax returns in order to find businesses that have incorrectly filed sales tax returns.
· T The California Board of Equalization is taking the door-to-door approach, sending teams to all California businesses to determine if they are handling sales tax correctly.
How does a business know if it is in the sales tax danger zone?
Some actions contribute to greater compliance risk:
· Bussinesses selling into multiple states are at greater risk of non-compliance than single-state sellers. The more states a business sells into, the more rules and rates it has to comply with.
· Businesses that use look-up rate tables or calculators (i.e., handling sales tax compliance manually) are at greater risk of non-compliance. These tools don’t always provide accurate rates, and manual processes are prone to error.
What should a business do if it finds itself in the danger zone?
A good starting point is to examine the businesses sales tax process against its sales tax requirements. Can the process handle the requirements? To answer this question, a business may want to consult an accounting professional.
If a business is not equipped to handle the complexity of its sales tax requirements, it might consider outsourcing its sales tax processes to an accounting firm or a technology solution. Outsourced solutions can automatically keep track of rates, changing laws, and filing deadlines.
Outsourcing can move a business out of the sales tax danger zone, saving time and money and dramatically reducing risk.
Founded in 2004, Avalara pioneered a service-based platform for sales tax and compliance automation and
has been recognized for years as one of America’s fastest growing technology firms. The company’s cloud solutions help thousands of customers stay focused on their core businesses by providing automated end to end compliance services including sales and use tax calculation, exemption certificate management, filing and remittance, and a broad array of related services.