Part II: Avoiding Hidden Traps with “Smart” Sales and Use Tax Software Tools
It is said that “an ounce of prevention is worth a pound of cure”. That is certainly the case in operations and quality control algorithms of any sales and use tax processing solution that reflects best practices. Fundamentally, the process includes: (1) finding the needed data from among the various accounts, (2) applying the most current rates and rules to that data, and then (3) utilizing those results to meet all business needs.
If a sales tax solution reflects best practices, it will find, address and prevent what might be called “hidden traps for the unwary”.
Identify the “Hidden Traps”
If you define the problem correctly, you almost have the solution [Stephen Jobs]
Here are a few examples of “hidden traps”
Nexus: Many states are arguing that the definition of nexus is outdated, and are now insisting out-of-state retailers collect and remit sales taxes on certain online transactions. Several such states have instituted “Amazon Laws” — inspired by the e-commerce giant Amazon.com® — that require sellers to pay sales tax on online purchases made by state residents regardless of the seller’s physical presence.
Services (including bundled services): Services are generally not taxable. However, some states have adopted a more aggressive approach to sales tax, referred to as “gross receipts taxes,” where services are generally considered taxable. This is true not only for personal services but for those services that businesses may provide to each other. And especially uncertain from a sales tax perspective are the so-called product/service mixes.
Freight-Follow: Some states have adopted what are commonly referred to as “freight-follow” rules. In these states, taxable freight that is separately stated on an invoice can be allocated to the taxable and non-taxable lines of the invoice and inherit the taxable nature of that line item.
Use Tax on Supply Chains: Depending on their location, your suppliers may not be required to collect and remit your state’s sales tax. If the transaction hasn’t been taxed, you can be left liable for the buyer’s use tax.
Jurisdictional Rate Mismatches: Even minor errors in sales and use tax can have major consequences. Consider the case of retail giant Wal-Mart, who was involved in a lawsuit regarding refunds given in one tax jurisdiction for purchases made in a different jurisdiction. As opposed to refunding the rates that applied at the time and location of purchase, refunds were given according to the tax rates of the store where products were returned. Under the terms of the Wal-Mart class action settlement, the retailer agreed to pay $5 million to establish a sales tax settlement fund and provide eligible Class Members with $3 to $15 Wal-Mart gift cards, which will vary depending on the number of claims filed.
Delivery Charges: Expertise is critical, as misinterpretations of state and local tax law can be damaging. In 2016, Papa John’s Pizza faced a class-action suit over claims that a misinterpreted Illinois sales and use tax law led to the improper taxation of delivery charges. Several states hold that taxes on separately-stated delivery fees, as with pizza and many other goods, are illegal. Papa John’s argued that customers waived their claims that the pizza company inappropriately taxed fees imposed on pizza delivery charges. In late 2016, a Madison County circuit Judge granted final approval of a settlement in the class action alleging that Papa John’s Pizza wrongly charged sales tax on delivery fees.
Best Practices in Finding a “Smart” Sales Tax Solution
SUT compliance is both a tax problem and a business problem. The objective is to equip companies with the right tools and content to produce a better workflow, fewer errors, reduced audit risk and the resultant fines. Here are some steps that will help you tame the sales tax process.
- Identify your business goals — Is your IT staff heavily involved with SUT maintenance? Are you optimizing growth? Are you including your SUT team in these key business decisions? Are you freeing up your tax department to make strategic business decisions instead of spending too much time on data collection? What are your metrics to measure success?
- Define selection criteria — Based on your business goals, decide on factors that are most important to stakeholders across the organization. Does your solution need to integrate easily with a specific ERP? Will it meet your cost needs? Selecting the wrong solution can negate the potential benefits you should be experiencing.
- Work with the rest of the organization — SUT compliance is not solely a tax issue. Key stakeholders across the organization, such as IT, need to be involved in selection, implementation, interaction and support. Be open to the fact that some processes, staffing and/or technology may need to change to maximize benefits.
- Choose the right SUT solution provider — The vendor should be reputable and able to provide a tax calculation system that combines industry-leading tax rate and taxability content with highly accurate jurisdiction boundary information.
- Training and support — As with any technology, it is important to ensure that users actually take advantage of its benefits. Treat a technology change as a business change.
Visit SalesTax.com today to learn about indirect tax solutions from Wolters Kluwer.