In today’s complex business landscape, sales tax compliance has become a critical concern for companies of all sizes. As a CFO or financial manager, you’re likely aware of the challenges and risks associated with failing to meet your sales tax obligations. But what exactly is sales tax compliance and why should it be a top priority for your business? 

Sales tax compliance refers to the process of accurately calculating, collecting, reporting and remitting sales taxes to the appropriate authorities. It’s a multifaceted responsibility that requires careful attention to detail and a thorough understanding of ever-changing tax laws and regulations. 

In this article, we’ll guide you through the essential steps of achieving and maintaining sales tax compliance. We’ll explore the key challenges you might face and provide practical strategies to help your business confidently navigate the complex world of sales tax. 

Understanding sales tax compliance obligations

Before getting into the specifics of compliance, it’s crucial to understand the basics of sales tax and how it differs from other types of taxes. Sales tax is a consumption tax imposed on the sale of goods and services, typically collected by the seller and remitted to the government. 

One of the most important concepts in sales tax compliance is nexus. Traditionally, nexus referred to a physical presence in a state, such as having an office, employees or inventory. However, the 2018 South Dakota v. Wayfair decision introduced the concept of economic nexus, which means businesses can have tax obligations in states where they have significant sales, even without a physical presence. It’s important to note that Wayfair did not change the fact that some states don’t charge sales tax. 

Each state sets its own economic nexus thresholds, which can vary widely. For example, some states may require businesses to collect and remit sales tax if they have $100,000 in sales or 200 transactions, while others might have higher thresholds. 

The rise of e-commerce and marketplace sales has further complicated the sales tax landscape. Many states now have marketplace facilitator laws, requiring platforms like Amazon or Etsy to collect and remit sales tax on behalf of their sellers. As a result, businesses must carefully track their sales across various channels to help ensure compliance. 

Seven key steps in achieving sales tax compliance

Navigating sales tax compliance involves a series of critical steps that every CFO, financial manager and tax manager must master to help support their company in meeting its obligations and avoiding costly penalties. These steps include: 

1. Determining tax obligations 

The first step in sales tax compliance is assessing where your business has a nexus. This involves reviewing your sales data and business activities in each state to determine if you meet the physical or economic nexus thresholds. Regularly monitoring your sales is crucial, as crossing a threshold can trigger new obligations. 

2. Identifying product and service taxability 

Understanding the taxability of your products or services is a critical aspect of sales tax compliance. Taxability can vary significantly across jurisdictions. For instance, clothing might be taxable in one state but exempt in another. Some products, like food items, may have different tax rates or exemptions based on their category or intended use. 

3. Consider prior exposure before registration 

Before registering, quantify your prior exposure, including potential interest and penalties. Be aware that registering before exploring state mitigation options like a Voluntary Disclosure Agreement (VDA) may disqualify your company from participating in such programs. It’s important that you understand what a VDA entails and whether you might be ineligible if you’ve already registered or collected tax. Also consider other state mitigation opportunities such as tax amnesties or compromise agreements. Options like filing past returns or seeking penalty abatement may be available as well. Carefully weigh these alternatives before proceeding with registration. 

4. Registering to collect and remit sales tax 

Once you’ve identified where you have nexus, you need to register with the appropriate state tax authorities. Each state has its own registration process, which may involve obtaining specific licenses or permits. Some states allow online registration, while others require paper forms. Be prepared to provide detailed information about your business structure, company’s officers, products and anticipated sales volumes.  Please note that registering for sales tax in a particular state may also necessitate filing income tax returns in that state.   

It’s important to understand that sales tax is often considered a trust fund tax. This means that as a business, you collect the tax on behalf of the state and are responsible for remitting it. The concept of a “responsible party” is crucial here — this is typically an individual who has control over or responsibility for collecting and paying taxes. 

During the registration process, you’ll likely need to submit personal information about the company’s officers, directors, shareholders and other responsible parties. This can include: 

• Addresses 
• Dates of birth 
• Social Security numbers 
• Copies of driver’s licenses and passports 
• Dates of taking office 
• Titles 
• Percentages of ownership 

Be prepared to provide this level of detail, as it’s part of the state’s due diligence in establishing who is responsible for tax compliance within your organization. 

5. Calculating correct tax amounts 

Accurate tax calculation is essential for compliance. With over 13,000 tax jurisdictions in the United States, each with its own rates and rules, this can be a complex task. You need to consider not only state-level taxes but also county, city and special district taxes that may apply to a single transaction. 

6. Collecting and managing exemption certificates 

If you sell to tax-exempt customers, such as resellers or nonprofit organizations, you need a system for collecting and managing exemption certificates. These documents prove that a sale is exempt from sales tax and must be readily available in case of an audit. Proper documentation and storage of these certificates are crucial for maintaining compliance. 

7. Filing returns and remitting taxes 

The final step in the compliance process is filing returns and remitting the collected taxes to the appropriate authorities. Filing frequencies can vary by state and may depend on your sales volume. Some states require monthly filing, while others may allow quarterly or annual returns. Most states now prefer or require electronic filing, but some still accept paper returns. 

Common challenges in sales tax compliance

Staying compliant with sales tax regulations presents several challenges for businesses. Some of the most common include: 

• Keeping up with changing regulations: Tax laws and rates change frequently, requiring constant vigilance. 
• Managing multi-state obligations: As your business grows, you may find yourself dealing with tax requirements in multiple states, each with its own rules. 
• Dealing with audits and notices: State tax authorities may conduct audits or send notices requiring prompt and accurate responses. 
• Handling exemptions and resale certificates: Managing these documents and confirming their validity can be time-consuming and complex. 

Best practices for maintaining compliance

To maintain sales tax compliance, consider implementing these best practices: 

• Maintain accurate records: Keep detailed transaction records, including sales data, exemption certificates, and filed returns. Use reliable record-keeping tools to help prepare yourself for potential audits. 
• Stay informed: There are several ways to stay on top of sales tax compliance, including the following:
  – Regularly review your physical and economic nexus status.
  – Invest in staff training and education on sales tax matters.
  – Consider joining industry associations or forums to stay updated on tax law changes. 
• Prepare for audits: Develop a process for handling audits, including designating responsible team members and organizing necessary documentation. 
• Utilize sales tax automation software: Implement technology solutions that can help automate the compliance process, from calculation to filing. 

Tools and resources for sales tax compliance

Technology solutions can significantly streamline your sales tax compliance efforts. Look for software that offers features such as: 

• Real-time tax calculation 
• Automatic updates for tax rates and rules 
• Integration with your existing business systems 
• Support for multi-state filings 
• Exemption certificate management 

Government resources, such as state Department of Revenue websites, can provide valuable information on tax laws and filing requirements. Additionally, consider consulting with sales tax professionals who specialize in sales tax to help ensure your business stays compliant as it grows and evolves. 

Simplify sales tax compliance with guidance and SALT services from BPM

Sales tax compliance is a complex but essential aspect of running a successful business. By understanding your obligations, implementing best practices and leveraging the right tools and resources, including specialized State and Local Tax (SALT) services, you can minimize risk and help make sure your business remains compliant with ever-changing sales tax laws. 

For companies looking to navigate the complexities of sales tax compliance, working with experienced professionals can provide invaluable support and peace of mind. BPM offers comprehensive sales tax consulting and compliance services tailored to the unique needs of businesses like yours. Our team of specialists can help you develop and implement effective strategies to manage your sales tax obligations efficiently and accurately. 

To learn more about how BPM can assist with your sales tax compliance needs, contact us.