Sales Tax FAQ:
What are the costs of sales tax compliance to my business?
Sales tax compliance represents an overhead cost of doing business – there is no offsetting revenue, yet compliance is mandated and enforced by audits and penalties. Done manually, sales tax compliance requires staff time searching out tax rates in more than 13,000 taxing jurisdictions nationwide, staff time that could be used elsewhere toward revenue activities. The cost and time involved with sales tax varies based on your sales volume and the salary base of the employees tasked with looking up and confirming rates for each item and each jurisdiction. Added to this, the amount paid as a service fee for credit card charges is calculated using the total purchase amount, including sales tax applied to the purchase, driving up the total cost of the transaction to businesses.
Why does sales tax become more complex the more my business grows?
As your business grows, the likelihood is that you will sell into more sales taxing jurisdictions, will increase the number of taxing authorities under which you have registered nexus, and will sell more items, which may fall under different taxing tables in accordance with varying state rules. More variables are introduced into the determination of sales tax correctly, while the likelihood of an audit and potential size of penalties grow.
What is "nexus," and how do we know if we have one?
Nexus is a legal presence in a given state. If a company has an office in a given state, that office or operation (even an unstaffed kiosk) may be considered as constituting nexus in that state. The interpretations of “nexus” are broad and variable, and states typically try to give these the broadest interpretation to maximize their sales tax base.
Is sales tax owned if a product is purchased through mail-order or on the internet?
The Supreme Court ruled in 1992 (in the case of Quill Corp. v. North Dakota, 504 U.S. 298) that mail order sales are not taxable if the selling company does not have a nexus in the purchaser’s primary jurisdiction (usually the state of residence). This has been applied to the Internet by assumption, without a further Supreme Court ruling.
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DID YOU KNOW?
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| According to a Price Waterhouse Coopers' April, 2006 study, Retail Sales Tax Compliance Costs: a National Estimate, businesses must shoulder a cost of compliance of between 2.17% of sales tax collected - for businesses with revenues of over $10 million - and as much as 13.47% for small businesses. |
| The top three sales tax compliance cost categories for small retailers are: (1) return preparation and related costs; (2) documentation of tax-exempt sales; and (3) training of personnel on sales tax. |
| An Exemption Certificate Management System (ECMS) is a solution that stores digital records of exemption certificates, tracks expiration dates of the certificates, and can be referenced automatically by the accounting package during invoicing so that sales tax is not collected when the sale is exempt. |
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