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© Avalara
Sales Tax 101 For The Small Business Owner
Presented by Brian MackinSales Manager
Making sales tax less taxing
About the Presenter –Brian Mackin
• Small business owner for over 30 years
• Joined Avalara 5 years ago as a project manager on the
Implementation Team
• Completed over 1000 AvaTax implementations
• Helps companies using a wide range of accounting
programs, online shopping carts, and billing systems get
compliant.
Making sales tax less taxing
Agenda
3
• What is your Sales Tax Risk Profile?
• The Challenges of Sales Tax Compliance
• Take a load off – How to minimize audit risk and automate the
compliance process
• Questions
Making sales tax less taxing
Polling Question #1
4
Are you the person at your company who has primary
responsibility for sales tax compliance?
a. Yes
b. No
Making sales tax less taxing
Sales and use tax compliance
52% of accounting professionals agree:
completing a marathon would be easier to accomplish
than understanding sales tax compliance laws.
Source: Wakefield Research 2013
Making sales tax less taxing
The state of our States
States are still recovering from the Great Recession
FY 2017, 17 states projected budget deficits totaling $19 billion
NRF estimates $24 billion in sales taxes goes uncollected on the Internet sales
Government estimates over 340 billion in sales over the internet in the US in 2015
Therefore
As tax-collecting agents of the State(s), they are looking to your business to find more money
This increased focus creates compliance risk for you
Making sales tax less taxing
States finding more sales tax revenueby passing new legislation
Making sales tax less taxing
States finding more sales tax revenueby adding new laws
The list of business activities that creates a requirement
to collect and remit taxes (Nexus) grows each year
More industries and products are being classified as
taxable – be aware of these changes and stay up to date
on the taxability research for your product offering
Making sales tax less taxing
When general sales
tax and selective
sales tax are
combined, sales tax
makes up 47% of
total state revenue
Where do States turn for tax revenue?
Source: US Census Bureau, 2012 Census of Governments: Finance – Survey of State Government Tax Collections at www.census.gov/govs/statetax
Total State Government Tax Collections by Category
Other taxes 3.9%
Corporation net income taxes 5.3%
Total license taxes 6.8%
Total selective sales taxes 16.6%
General sales and gross receipts taxes 30.5%
Property taxes 1.6%
Individual income taxes 35.3%
Making sales tax less taxing
Nexus – Where should you be collecting sales tax?
Exemption Certificate Management
Product & Service Taxability
Jurisdictional Rate Assignment
Sales Tax Returns
Reporting & Audit Defense
What Is Your Sales Tax Risk Profile?
Making sales tax less taxing
The Sales Tax Landscape
Making sales tax less taxing
Nexus… Where to collect and remit?
• Quill vs. North Dakota (1992) – U.S. Supreme Court
– The Commerce Clause vs. Due Process
• “Substantial” Physical Presence
– Office or Warehouse
– Employees
– Contract Sales Force or Installers
– Regular Visits
• The Future?
– Economic Nexus and the Marketplace Fairness Act
– Technology is easing the burden making the Commerce Clause
argument less compelling…
Making sales tax less taxing
Do you have traveling sales people in the state?
Do you utilize contract labor in the state?
Do you have company representatives in the state?
Do you own or lease any real or personal property in the state?
Do you promote your products or services in the state?
Do you participate in trade shows or exhibits in the state?
(And every year this list continues to grow)
Have you created nexus?
Making sales tax less taxing
Nexus-creating activities: a growing list
Multi-state locations
Maintenance/service/repairs
Own/lease real property
Hosted DataCenters
Field sales/service staff
Charge Licenses/royalty/fees
Direct and/or online sales
Maintains inventory
Affiliates
Tradeshows
Commissions to resellers (1099s)
Investors/board members
Marketing/Web advertising
Drop shipments
Making sales tax less taxing
Polling Question #2
15
How many states require sales tax to be collected/remitted?
A. 39
b. 42
c. 46
d. 50
Making sales tax less taxing
Nexus – Where should you be collecting sales tax?
Exemption Certificate Management
Product & Service Taxability
Jurisdictional Rate Assignment
Sales Tax Returns
Reporting & Audit Defense
What Is Your Sales Tax Risk Profile?
Making sales tax less taxing
The Sales Tax Landscape
Making sales tax less taxing
In July 2013, Wakefield Research conducted a survey among 400 accounting professionals using an email invitation and an online survey. .
These accounting professionals were at companies with $1 million or more in total revenue.
1 in 4 Companies Don’t Track Their Exemption Certificates
24% have no system for
tracking exemption
certificates.
76% have a system
for tracking
exemption
certificates.
1 in 4 Companies Don’t Track Their Exemption Certificates1 in 4 Companies Don’t Track Their Exemption Certificates
Making sales tax less taxing
Identifying and managing exemptions
Three primary exemptions:
Product-based (generally does not require exemption certificate)
Entity-based (requires exemption certificate) – deduction specifically related to the exempt status of the purchaser.
Use-based (requires exemption certificate) – exemptions covering products and services which are used for a particular purpose:
Making sales tax less taxing
Nexus – Where should you be collecting sales tax?
Exemption Certificate Management
Product & Service Taxability
Jurisdictional Rate Assignment
Sales Tax Returns
Reporting & Audit Defense
What Is Your Sales Tax Risk Profile?
Making sales tax less taxing
The Sales Tax Landscape
Making sales tax less taxing
Product and Service Taxability
What is taxable in one state, may be exempt in another
Check with each jurisdiction for unique product taxability laws
Product taxability laws are not consistent
Similar products might be taxed differently
Different industries have varying taxability rules
TaxableNon-taxable
Making sales tax less taxing
Understanding product & service taxability exceptions Rules and rates vary between states
The following industries have varying taxability rules:
Software / hardware
Digital goods
Services
Medical device / equipment
Food / beverage
Clothing / apparel
School-related products
Dietary supplements
Making sales tax less taxing
Nexus – Where should you be collecting sales tax?
Exemption Certificate Management
Product and Service Taxability
Jurisdictional Rate Assignment
Sales Tax Returns
Reporting & Audit Defense
What Is Your Sales Tax Risk Profile?
Making sales tax less taxing
Nexus – Where should you be collecting sales tax?
Exemption Certificate Management
Product and Service Taxability
Jurisdictional Rate Assignment
Sales Tax Returns
Reporting & Audit Defense
What Is Your Sales Tax Risk Profile?
Making sales tax less taxing
Making sales tax less taxing
• 150+ million mailing addresses
• 11,000+ jurisdictional rules
• 35,000+ sales / use / rental tax rates
• ~ 30 M product / service exemptions
• 750,000+ buyer / seller exemptions
Making sales tax less taxing
Polling Question #3
28
How does your company determine where to collect sales tax?
a. Collect in states with employees or offices
b. Collect in states where we have employees, offices, contractors, or
inventory.
c. I don’t know.
Making sales tax less taxing
Nexus – where should you be collecting sales tax?
Exemption Certificate Management
Product & Service Taxability
Jurisdictional Rate Assignment
Sales Tax Returns
Reporting & Audit Defense
What Is Your Sales Tax Risk Profile?
Making sales tax less taxing
The Sales Tax Landscape
Making sales tax less taxing
Make sure you know the sales tax return deadlinesFiling Frequencies can change
Check with each jurisdiction for filing requirements
Jurisdictions typically send out notices in advance of a
filing change
Even if you don’t receive a notice, you are still expect to
meet the new filing deadlines
Remitting sales tax the right way
Making sales tax less taxing
Remitting sales tax the right way
Find out whether the jurisdictions require pre-payments
Adjust your calendar accordingly (filing frequency
requirements vary)
Pre-payments can have different filing schedules than regular
returns
Making sales tax less taxing
Avoid these common mistakes
Failing to file a return
Failing to report sales
Taking excessive credits or exclusions on a return
Filing returns with errors
Return information that doesn’t match other records
Mistakes found in previous audit
Previous finding of exemption certificate misuse
Not reporting use tax
Making sales tax less taxing
Manual sales tax management is time-consuming, risk prone, and expensive
Source: Wakefield Research, July 2013
Average total cost for
businesses to manage a
sales tax audit
Average time spent filing
sales tax returns and
remitting payment
11 hours per week
Percentage of businesses
that believe a sales tax
auditor would find a mistake
Making sales tax less taxing
- Sales Tax Returns
Sales Tax Returns
Making sales tax less taxing
Reduce audit risk
Keep your sales tax collection records in perfect order
Clear and complete
Easily accessible
Show details of each transaction
Making sales tax less taxing
Polling Question #4
37
4. How does your company store exemption certificates?
a. Collect them manually and store them in folders or a file cabinet.
b. Collect them manually and maintain an Excel file to manage them.
c. Collect/store them electronically, and I am confident all of them are
current.
d. Collect/store them electronically, but I’m not confident all of them are
current.
Making sales tax less taxing
Pay Use Tax
Sales tax – Intrastate transaction, Collected by the seller on the
gross receipts from a retail sale
Seller’s Use tax – Interstate transaction, where the seller is
compelled to collect tax because of Nexus
Consumer’s Use tax
Purchases of equipment and supplies from out-of-state for
use in business
Withdrawals of inventory for taxable use such as R&D,
promotional materials, warranty repairs, etc.
Making sales tax less taxing
Bundled Transactions: Defined
• A “Bundled transaction” is a sale of multiple sales tax
objects with a single sales price. The sale may include
both taxable and nontaxable objects.
• The vendor charges a customer one sales price for all
objects sold instead of separately charging for each
individual object.
39
Making sales tax less taxing
Bundled Transactions. Why?
• As services take a larger and larger role in commerce,
more and more transactions include an element of
service.
• Stand alone services, or at least those separately stated,
present a significant challenge in determining taxability
by themselves.
• Bundling services with TPP compounds the challenge.
40
Making sales tax less taxing
Know the difference betweenBill to and Ship to
Sourcing. Most states are destination-based (they charge
sales tax based on the location of the end-user), there are
several that base sales taxes on the seller’s location.
Making sales tax less taxing
How to reduce audit risk
Do a nexus study
Stay up-to-date with rate,
rule, and boundary changes
Report consumers’ use tax
Be compliant from day one,
especially new businesses
Automate with technology
An understanding of your filing
requirements
Calculations that are rooftop
accurate
Product taxability coverage
Detailed sales records
A process for managing
exemption certificates
You should: Make sure you have:
Making sales tax less taxing
Polling Question #5
43
4. How would you rate your difficulty in managing sales and use taxes
correctly across the many jurisdictions where your company
provides products and services?
a. Easy
b. Moderate
c. Difficult
d. Impossible
Making sales tax less taxing
How AvaTax WorksA Tax Engine in the Cloud
AvaTax does not support cash basis accounting - must be accrual
Transactional
Data
Returns &
Remittance
Rates &
Rules
Connector
Making sales tax less taxing 45
Brian MackinSales ManagerDirect Line: (206) 826-4900 x 1141
Questions:
