United States

Are you sure your company is making the right sales and use tax decisions?

INSIGHT ARTICLE  | 

Three reasons you may have more sales and use tax concerns than you think

Many companies assume that they do not have to be concerned about sales and use tax when, in reality, they do. Why? Nexus, sourcing and exemptions.

These three areas cause more missteps than you might expect. Don't make assumptions. Before deciding that sales and use tax compliance is not an issue for your company, be sure you've considered the following three issues.

Nontraditional approaches to nexus

You may believe that if your company has no employees or property located in a state, it automatically has no sales and use tax concerns in that jurisdiction. That is true under the traditional approach to analyzing whether you have physical presence (nexus) in a state. Today, however, you need to ask, "What constitutes physical presence?"

Drop shippers, affiliates and independent contractors may all be creating nexus in states where you don't think your company has it. States are increasingly focused on attributional nexus to gain taxing authority over activities that were once out of reach. And click-through nexus rules are picking up steam.

Nexus is simply not what it used to be, and the pace of change is rapid. If you haven't reviewed your company's nexus footprint in the past 12 months, your sales and use tax conclusions may no longer be valid. In fact, odds are good that your company is overpaying or underpaying in at least one jurisdiction.

Sourcing issues

Once you've determined where your company is required to collect or remit sales and use tax, you need to be sure you are remitting the right tax to the right state. This is where sourcing comes into play, and you cannot just rely on your customer's billing address.

Most states use destination sourcing for most sales, but "destination" is often not clearly defined. Destination could mean the delivery address, the billing address or where the goods were first put into use. Further complicating matters, digital goods and services can be used concurrently in multiple states. This creates the potential for multiple taxation as credit rules are not clearly applicable in these circumstances.

These distinctions may seem like subtle shades of gray, but the decisions you make can make the difference between black and red on the balance sheet. It is important to understand how sourcing can be applied in different situations and document a position that is statutorily valid and advantageous to your business.

Applicability of exemptions

Some sales are simply exempt from sales and use tax. But, whether secured by company type or the product or service purchased, exempt status is far from simple. Wide state-to-state variations exist in exemption provisions and qualifying requirements, and the steps necessary to properly claim an exemption can be complicated.

Whether your business is on the selling or purchasing side, proper management of exemption certificates is critical. As a seller, you must make certain that exemption certificates received are valid, properly managed through the supply chain and filed appropriately. In an audit, you—not your customer—may be held responsible for uncollected sales tax on sales that were improperly treated as exempt.

On the other hand, if your company is a tax-exempt organization, or making tax-exempt purchases, you need to understand your exemptions and track purchases properly. Speaking of tax-exempt purchases—are you certain your company is current on the many exemptions provided to promote business investment in different industries and jurisdictions? You may be paying sales tax on purchases that should be exempt.

The high cost of getting it wrong

It is essential to have control over your sales and use tax processes, which means understanding that sales and use tax decisions are not "one and done." They need to be revisited and re-evaluated regularly. As business models change to include more contractors and other third parties, as supply chains grow more complex and as technology makes it easier than ever to expand your reach into new markets, the challenges and risks inherent in the collection and remittance of sales and use taxes grow ever more important. Now is the time for a thorough review of your company's sales and use tax policies, procedures and tools.

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