Savvy CFOs understand that sales and use taxes are complicated and that noncompliance can result in difficult audits and high penalties. However, many CFOs don’t realize just how complicated this area of taxation is or just how high the penalties for mistakes can be.
These five must-knows should shed additional light on the subject.
1. Sales and use taxes are complicated and getting ever more so. More than 10,000 U.S. taxing jurisdictions charge sales and use tax. Additionally, mandates can vary greatly from state to state and municipality to municipality — making compliance a challenge, especially for organizations that conduct business in multiple jurisdictions or sell over the internet. Rules are in constant flux. In just one year, we at Wolters Kluwer track thousands of sales tax rate and taxability changes.
An additional complicating factor is that many governing bodies see sales and use tax as a growing revenue area. Sales and gross receipts tax already make up nearly 47 percent of total state taxes (source: U.S. Census Bureau 2015 data at census.gov). State and local jurisdictions are interested in protecting and expanding this revenue area.
2. Audits have high costs and often trigger repeat audits. CFOs generally understand that audits are costly but perhaps not to the extent that this is true. In 2016, Wolters Kluwer partnered with the Aberdeen Group to survey tax professionals (Download the white paper here: Improve Your Sales and Use Tax Compliance to Grow Your Business). This study revealed that 97 percent of respondents were audited in the past five years, and 17 percent faced fines. These penalties ranged from between 1 to 2 percent of revenue. For a company with $250 million in revenue, that can be up to $5 million — in fines alone, not to mention, the time and resources spent on audit defense and correcting underlying process problems.
Furthermore, once an organization has been audited, it is likely to be audited again. The study showed that 34 percent of those audited in the past five years have been audited more than five times.
3. Leading businesses are turning to automated sales and use tax software. To manage this complicated area, the most compliant and strategic companies are optimizing their company’s sales and use tax workflows by implementing high-end sales and use tax software. Investing in sales tax software and its underlying tax rate content mitigates not only the risk of negative audit penalties but improves overall efficiency. It is easier for tax staff to track rates changes, add/remove product SKU to keep up with your business changes and efficiently produce business reporting. Such software, when correctly deployed, can also reduce time needed by IT to support rate changes, reporting and tracking.
4. It’s important to understand sales and use tax implications before making business decisions. Where you sell, store, manufacture and source goods all affect sales and use tax and can extend your company’s nexus, which is why it’s important to evaluate tax implications before making decisions. Also, when expanding, it’s important to review your sales and use tax workflows to ensure that you have the efficiency in your processes to meet obligations in additional tax jurisdictions.
5. Your indirect tax team has vast knowledge – make use of it. Because your indirect tax team has a bird’s eye view of the business that includes the full lifecycle of all your products and services, smart CFOs make it a habit to consult with them periodically to gain business insights.
To get more information about sales and use tax and what you need to know about this issue, download the Improve Your Sales and Use Tax Compliance to Grow Your Business white paper.