Sales Tax Compliance: Best Practices
As a sales tax manager in the United States, it's essential to ensure compliance with various tax laws and regulations while also striving to reduce errors, improve efficiency, and be more transparent with other teams. Here are the top 8 things American sales tax managers should do to achieve these goals:
Stay up to date with changes in tax laws and regulations
Tax laws and regulations can change frequently and not all of the tax authorities make it obvious when the laws or rules are changing, and it's crucial to stay informed about any updates or changes that may affect your organization. Things like sales tax rates can change frequently, by keeping up to date, sales tax managers can ensure that they are compliant with the latest laws and regulations and avoid costly penalties and fines.
To stay informed, sales tax managers should consider subscribing to relevant newsletters, attending conferences or webinars, and reading industry publications. Additionally, joining industry associations like the Institute for Professionals in Taxation can help you network with other sales tax professionals and learn from their experiences. Sales tax managers can also work with tax consultants or attorneys to ensure they have a complete understanding of the tax laws and regulations.
Communicate effectively with other teams
Effective communication with other teams within your organization is crucial for efficient sales tax management. This could include working closely with your sales team to ensure that all sales are accurately recorded and tax is calculated correctly. It could also involve liaising with your finance team to ensure timely remittance of tax return payments.
To ensure effective communication, sales tax managers should establish regular meetings with other teams to discuss any tax-related issues and develop strategies to address them. Sales tax managers should also ensure that all stakeholders are aware of their responsibilities and are kept informed of any changes to tax laws or regulations. Regular training to other teams can also help ensure that everyone knows the requirements and best practices for sales tax compliance.
Implement a system for managing nexus
Managing nexus is a critical aspect of sales tax compliance. Sales tax managers should have a system in place to identify where their business has nexus and ensure compliance with state tax laws. A good practice is to conduct regular nexus reviews, which involve analyzing business activities in different states to determine whether they trigger sales tax obligations. This review should be done on a periodic basis, such as annually or semi-annually, to ensure that the company is up to date on the latest nexus laws and regulations.
To manage nexus effectively, sales tax managers should also stay up to date on changes in nexus laws. For example, many states have expanded their nexus laws in recent years after the South Dakota v. Wayfair case to include economic nexus, which means that businesses with a certain level of sales or transactions in a state must collect and remit sales tax even if they don't have a physical presence there. Staying up to date on these changes can help sales tax managers avoid compliance issues and potential penalties.
Finally, sales tax managers should ensure that their sales tax software or other tools are configured to account for nexus. This might involve setting up rules in the software to automatically apply tax rates and exemptions based on nexus, or implementing a system to track and manage exemption certificates for different states.
Have a clear process in place for tax exemption certificates
Tax exemption certificates are required to support exempt sales (or sales for resale) and prove compliance with sales tax laws. Having a clear process in place for managing these certificates can help ensure compliance and reduce errors. The management of these certificates doesn’t seem important until there is a tax audit. In the tax audit not having these certificates can cause you to suddenly have a large tax liability and a major review of your tax reporting and tax collection procedures. The certificates are a very important tax purpose for the tax department to do accurately.
The process should include providing clear instructions to customers and other departments on how to provide a valid exemption certificate and implementing a process to validate certificates received. Additionally, sales tax managers should ensure that all exemption certificates are properly documented and maintained. Keeping track of expiration dates and renewals can help avoid issues with non-compliance and keep the process streamlined.
Utilize tax automation software
Using tax automation software can help streamline your sales tax management process, reduce errors, and increase efficiency by relying less on manual processes. Tax automation software can perform tasks such as tax calculation, filing, and remittance, freeing up time for your team to focus on more complex tasks. There are many different tax automation software options available, so be sure to choose one that is tailored to your organization's needs. Many of the tax automation tools can handle sales tax, use tax, and other local taxes like Business and Occupancy (B&O Taxes).
Many of the automation software on the market will provide an automated solution for taxability determination, following current tax rules as well as allowing for a customized tax system for your business. This will also generally integrate into the exemption certificate management and sales tax returns software suite.
When selecting tax automation software, consider factors such as ease of use, scalability, and compatibility with other systems. Ideally, the software should be able to integrate with your existing systems with little to no middleware, systems such as your e-commerce platform, accounting software, and ERP systems. Additionally, ensure that the software complies with the latest tax laws and regulations and can adapt to changes quickly. Ideally, the system will have a great content provider, and this will update the sales tax rates, nexus thresholds, and new tax regulations/taxability rules automatically.
Conduct regular reconciliations
Regular reconciliations can help identify any discrepancies in your sales tax management process, reducing the risk of errors and ensuring compliance with tax laws and regulations. This could involve comparing sales data with tax filings, reconciling tax payments to bank statements, and verifying tax rates and exemptions.
Depending on your organization’s existing process, this is a good time to also look into use tax compliance, and if your effectively capturing all the tax liability on that front. Many taxpayers find out in audits that they did not have an effective process to capture use tax, and many find that they failed to pay tax on these taxable purchases.
To conduct reconciliations, sales tax managers should establish a clear process and schedule for reconciling tax data. The process should include verifying the accuracy of data, investigating and resolving discrepancies, and documenting the reconciliation process. By conducting regular reconciliations, sales tax managers can ensure that their sales tax management process is accurate and up to date.
Conduct regular reverse sales tax audits
Reverse sales tax audits are a proactive measure that can help sales tax managers identify potential issues before they are flagged by tax authorities. During a reverse sales tax audit, the sales tax manager examines sales transactions and associated tax calculations for potential errors or omissions. This process can help identify areas for improvement in the company's sales tax compliance processes.
In addition to identifying potential issues, reverse sales tax audits can also help companies recover overpaid taxes. By examining sales transactions and associated tax calculations, sales tax managers can identify instances where too much tax was paid and file for a refund.
It's important to conduct regular reverse sales tax audits to ensure that the company's sales tax processes are effective and compliant. The frequency of these audits may vary depending on the size and complexity of the organization, but they should be conducted at least once a year.
When conducting a reverse sales tax audit, sales tax managers should review all relevant documents, such as sales invoices, purchase orders, and exemption certificates. They should also verify that all sales transactions have been accurately recorded and that all applicable taxes have been collected.
If major discrepancies are found, a voluntary disclosure should be considered if there is a substantial tax liability, or if the potential tax assessments may lead to bad publicity for the business.
By conducting regular reverse sales tax audits, sales tax managers can help ensure that their organization is compliant with sales tax laws and regulations while also identifying potential opportunities for cost savings.
Develop a process for managing audits
Sales tax audits can be a stressful and time-consuming experience, but having a clear process in place can help minimize the impact. Sales tax managers should develop a process for managing audits that includes several key steps.
First, it's important to identify the scope of the audit. This might involve reviewing the auditor's request for documentation and conducting an initial analysis of the issues that are likely to arise. Next, the sales tax manager should gather all the necessary documentation, such as sales records, exemption certificates, and tax returns, to support their position.
During the audit, the sales tax manager should work closely with the auditor to resolve any issues that arise. This might involve providing additional documentation, clarifying the company's position on a particular issue, or negotiating a settlement. Throughout the audit, it's important to maintain a clear audit trail that documents all the steps taken and the decisions made.
After the audit is complete, sales tax managers should review the results and identify any areas for improvement. This might involve updating processes and procedures to avoid similar issues in the future or implementing additional controls to ensure compliance.
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