Over the last few years, businesses have been inundated with new and evolving sales and use tax compliance burdens. Businesses of all sizes have had to contend with an increasingly complex state and local sales and use tax compliance landscape, continuous proposals or enactments of laws broadening the sales tax base or raising rates, and a host of sales tax nexus issues arising in the post-Wayfair world.
As logistically challenging as those developments have been, many businesses have found that navigating the COVID-19 pandemic has been worse. Slowing business, stay-at-home orders, temporarily restricted retail spaces and furloughed employees have businesses scrambling to complete necessary tax compliance accurately and timely. Layoffs and furloughs may have included tax staff, or those with institutional knowledge of the nuances of how compliance was performed. Many businesses are also undergoing transition to a completely, or mostly, remote environment, resulting in an increased need of better connectivity within the tax function itself.
Together, these dynamics emphasize the importance of a successful and efficient sales and use tax compliance process. Inefficiencies and inaccuracies can lead to exposure for underpayments and unnecessary overpayments. A process review may help respond to these impacts by improving cash flow and establishing higher confidence in the entirety of the sales tax function, as well as identifying refund opportunities and enhancements to technology that could benefit multiple business functions.
The sales and use tax process review
A sales and use tax process review involves a comprehensive analysis of each sales and use tax-related function by analyzing current processes against best practices. Process reviews are intended to identify and quantify process gaps, inefficiencies and areas of risk. These types of review have broad applicability to businesses that both purchase and sell products and services.
Most businesses are challenged with maintaining compliance with the myriad of sales and use tax requirements. The evolution of sales and use tax nexus standards, along with ever-changing tax rates and taxability determinations, often creates a substantial burden on a company’s resources. Many companies lack the resources required to understand, establish, implement and maintain an efficient and effective sales and use tax function along with required processes. A sales and use tax process review can help a business understand the impact of process breakdowns on operations and identify inefficiencies within the sales and use tax compliance process. For example, a process review may broadly find that developing clear roles for accounts payable staff in context of a robust taxability review will reduce overpayments and errors. More narrowly, that review may identify nuanced improvements in a specific compliance routine improves accuracy without a significant cost.
Certain businesses may have an increased urgency for a review, including businesses in the consumer products and industrial products industry, businesses with complex sales and use tax compliance environments, businesses with large sales and use tax assessments and multistate businesses that have never performed a review of the sales function from purchase to remittance. Process reviews may also complement the rollout of a new implementation of financial reporting, accounting or procurement software or that have recently implemented such software but have not integrated sales and use tax reporting.
Common inefficiencies identified in a process review may include laborious and multi-step tax determinations, outdated software or tax calculation materials, gaps in the exemption certificate process, lack of dedicated processes and routines, and exposure to jurisdictions not currently filing. A comprehensive process review consolidates these findings, identifies and triages problem areas based on risk, and recommends solutions that often leads to better compliance and improved cash flow. Ultimately, an improved sales and use tax compliance process can help mitigate future exposure and provide better handling of state and local tax audits.
The COVID-19 crisis is creating economic challenges for many businesses. As companies strategize addressing serious cash flow concerns, it is crucial for businesses to remember that state and local taxing authorities will continue to perform sales and use tax audits and send nexus questionnaires. A complete understanding of the sales tax function can help prepare businesses for future growth, prepare for audits and provide confidence that the correct amount of tax is remitted or accrued.
