By Amiee Keenan, Avalara
When you’re prepared with the basics about what sales tax compliance is (and isn’t), you’ll have the sales tax edge. You’ll understand something that many businesses struggle with–and you may even be able to avoid a negative audit.
Ready to learn about what sales tax really is? Let’s start with the worst case scenario.
Imagine a Sudden Tax Audit
Here’s the situation: You just received notice that you’re being audited for sales tax and you have three short days to get your books in order. You frantically call your accountant and ask him to start organizing your past twelve months of sales.
Your company has never been audited before, but you believe that you accurately record all sales and assigned rates, and that you have always filed and remitted on time. You keep all of your exemption certificates in a filing cabinet in the back room and you have a master spreadsheet of all the rates, rules, and boundary changes as they occur where your business is based. You sell online now and again, but it’s nothing significant and it’s always to customers who are just over the state line. You consider your business more or less protected. And while you don’t literally have insurance against errors, you do feel assured that your bookkeeper’s records are good enough.
Following the audit, you’re totally surprised when you see a proposed fine of $30,000 for missing exemption certificates, and undercharged sales tax rates.
Cold sweat on your brow? Breathing shallow and fast? Here’s what happened.
What’s Up with Sales Tax?
Sales tax impacts just about everything: digital goods, services, even dog food. It’s collected almost everywhere in the country (there is that handful of outlier tax-free states). Sales tax is also surprising–just when you thought you knew what your state was up to, your lawmakers will up and change the tax laws.
That’s not all! If you’re basing the tax rates in your ERP system’s rate tables off of ZIP codes, you’re setting your business up for some serious fines and penalties.
Why You Can’t Base Sales Tax Off of ZIP Codes
The U.S. Postal Service developed Zone Improvement Plan (ZIP) codes in the 1960s, so that mail could be delivered more efficiently. What many people don’t know is that these “zones” can not only overlap each other, they can be adjusted and, sometimes, they might not represent a geographic region at all. In any given year, the USPS makes numerous boundary changes to ZIP code areas, which makes them an unstable data source. Most importantly, tax jurisdictions do NOT correspond with ZIP code regions. That means basing sales tax rates on a ZIP code risks applying not only an incorrect sales tax rate, but remitting it to the incorrect jurisdiction.
This means that the information you put in your ERP system can quickly snowball into a dire situation. In the end, inaccurate or “good enough” information is bad for your customers, bad for you and, if the state comes calling, they’re going to penalize you if they find out.
Not worried about sales tax? Have it handled? Good for you! (I’ll keep my fingers crossed that your strategies are sound.) For everyone else, read on.
Your ERP system has a pre-built integration with technology that can automate the entire tax compliance process. That means you’ll have accurate rates, up-to-date taxability, valid exemption certificates, and timely returns every time—and all from within your existing system. Is your mind blown?
Read this free primer on how to prepare for an audit to gain valuable insight on what you can do to get your business audit ready. The primer even has a handy checklist!