2009 Review of Sales & Use Tax Systems

Others, like New York and North Carolina, have adopted new laws that attempt to catch up to the Internet age by claiming that national retailers like Amazon, eBay and Overstock.com have a nexus in their states just by having “affiliates,” which includes websites that are based in the state if they have click-through ads linking to those retailers.

Sales tax compliance may be the most volatile area for many businesses, especially for those in multi-state corridors and small ones that are using the Internet to reach customers in many different states and regions. At least brick-and-mortar store operators know where their taxation issues will be, where as retailers with a web presence may not always know their nexus and taxation responsibilities.

As sales and use taxation has become more difficult, new products have come to the market and existing ones have increasingly specialized. There are essentially two genres of sales and use tax compliance programs: Automated/real-time systems and rate look-up with after-the-fact preparation.

Automated systems are generally for mid-sized and larger businesses looking to implement a system that runs in the background of their live sales and e-commerce applications, automatically looking up and verifying rates using an online system that also checks for taxability rules, and then integrates with the sales and accounting systems to post the appropriate rate to a transaction and to appropriate GL accounts. The systems also often offer period-end compliance, with data automatically flowing into review-ready returns for each jurisdiction.

After-the-fact sales and use tax systems can be either web-based or installed locally, and provide rate lookups and compliance, with data generally either imported from an accounting system or manually entered. These systems are best suited to smaller businesses with less complex sales taxation issues. And not every small business needs a sales and use tax system, especially the smallest ones that do business from a single location. For these entities, their state’s taxing authority may have a simple online reporting and payment system.

For professional accountants, helping small business clients avoid costly penalties is not an act of altruism. You do it because when they are fiscally healthy and growing, your practice benefits, too. And as this form of taxation has become more complex and thus more challenging for small businesses, it poses an ideal compliance service option for some practices.

The process is mostly a matter of using the right tools, knowing what resources to use and managing due dates — processes in which tax and accounting practices are already experts (hopefully). But while many practices may have stayed away from offering sales tax compliance as a service in the past, largely because it could be grueling and tedious work, the good news is that modern sales and use tax systems make the processes much more manageable. Some of the vendors of these systems are also starting to add multi-entity management tools, communication functions and even portals, making the systems more amenable to use in a modern practice serving dozens or more business clients.

Sales taxes won’t get easier until there is a federally mandated national sales tax or Internet tax, neither of which seems too close on the horizon since such legislation would certainly have to go through a lengthy court review process. The Streamlined Sales Tax initiative may seem closer at hand, but it is still a voluntary system that doesn’t necessarily simplify the process for small businesses.

So in the meantime, with states on the prowl for more revenue, it is more important than ever that small businesses effectively manage their sales tax compliance obligations. And if you help them, they can get back to what they do best, which is running their business. After all, the heart of sales tax is sales, and if they can get their customers spending again, that will help the states and the larger economy, too.

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2009 Review of Sales & Use Tax Compliance Programs — Comparison Chart

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