5 Rules To Follow When Creating A Tax Compliance Strategy
More and more CFOs, controllers, and finance and accounting professionals realize that a tax compliance strategy is a critical factor in achieving growth and efficiency goals. In fact, finance leaders who take the initiative to improve how their company manages sales and use tax are typically able to:
- Reduce the time, effort, costs, and resources required to manage sales tax compliance
- Improve the accuracy of applying tax or exemptions to all transactions
- Grow the business without putting it at risk or missing out on revenue opportunities
- Create a better buying experience for customers
- Minimize exposure from audits and reducing the likelihood of errors
Check out this whitepaper from Avalara, or read on to discover the five rules of thumb every CFO, controller, and finance and accounting professional should weigh in on when creating a sales tax strategy...
1. Realize you have a sales tax problem
This can be hard for some companies to admit, yet it’s not a failing, but rather a by-product of success. Every growing company will likely experience pains around sales tax at some point. If you’ve ever personally dealt with sales tax, you know it’s a complex, time-consuming, and costly process to manage. So why wouldn’t you want to make the process better?
Seeing the problem: How much time are you devoting to sales tax-related activities? According to Wakefield Research, the average company has six dedicated staff spending 39 hours a month on sales tax-related activities. Think about it: Each state, and in some cases each local jurisdiction, has its own set of tax rates, rules, exemptions, product taxability, and filing requirements. It’s your responsibility to ensure the company complies with all of them – for every transaction, every time, and everywhere you sell, no exceptions and no excuses (should you ever get audited). Yet, virtually all finance executives are dismayed when they realize staff spend 25 percent of their time researching tax rates and rules and filing returns.
Solving the problem: It’s tempting to relegate sales tax to a line item for the accounting team. But this isn’t sustainable if your company is growing. While it may seem counterproductive to spend energy on a pass-through activity that doesn’t generate revenue, how you manage sales tax can have a big impact on your bottom line.
Getting sales tax right influences everything from resource allocation to supply chain relationships to customer engagement, so don’t leave it out of your planning efforts. The more efficiencies you build into your process, the better for the business.
2. Everything (and we mean everything) is about nexus
It’s been called the 800-pound gorilla of sales tax compliance. Nexus is the connection to a state that obligates a company to register and remit sales and use tax to that state, and it’s been a hot topic of debate in Congress and the courts for years. Historically, physical presence was the rote criteria for nexus, but the growing viability of online, remote an cross-border transactions led many states to rebuke the physical presence standard as outdated and inadequate, citing millions in lost revenue from remote sales.
A growing number of states have expanded their sales tax nexus rules to include more online and offline business activities.
Seeing the problem: State and local governments rely on tax revenues from business growth and they’re constantly evolving their tax policies (often nexus-related) to target activities that fuel that growth. In fact, sales tax nexus can now be triggered by even the most basic business activities. These include:
- Hiring employees and contractors in remote offices
- Expanding to new office locations
- Selling new products and services
- Selling online or through new sales channels
Yet, accounting or finance teams may not intuitively connect these activities to taxability, which means you may be failing to meet your nexus obligations.
Solving the problem: The best nexus defense is a good offense. Do you have a clearly defined process and plan for understanding and implementing new sales tax obligations for your company? If the answer is no, it’s time to do something about it. A good place to start is with a nexus analysis study. It will provide peace of mind that you’re not missing or overlooking any compliance obligations, and help drive your strategy.
3. Identify where change will have the biggest impact
Rapid growth can quickly change your tax profile and liability, and the downstream effects of managing this change can impact operations. For many companies, this is the tipping point to taking action. More finance executives are starting to see the effects that inefficient sales tax management practices can have on the business and looking for ways to remove compliance hurdles that could hinder growth.
Seeing the problem: For growth-driven companies, the ability to scale in key areas of the business is critical. This holds true for how you manage sales tax as well. Identify where you may have weaknesses now or in the future: Is IT being tasked with too-frequent requests to update sales tax rates and rules? Is audit risk higher because of new or pending product, service, or sales channel changes? Is your finance team bogged down trying to keep up with remittance and filing requirements in more states?
Solving the problem: Think seriously about tax automation. Employing software to do the work of staff not only cuts down on errors and audit risk, it’s also more efficient. You’re less reliant on internal staff to manage sales tax, which means those resources can be reallocated to higher-value activities. Talk to your peers and platform provider. Ask them how they know they’re doing sales tax right. Explore cloud solutions like Avalara that are pre-certified to work with your ERP, ecommerce, and accounting systems or offer an API for simple easy setup and integration.
4. Sync your sales tax strategy with your 5-year growth plan
Growth strategies can vary widely among companies, but a future-forward sales tax strategy actively addresses where you’re likely to grow next and simplifies those tax responsibilities proactively.
Consider the following common growth-related events as businesses evolve:
- Selling online or through new sales channels
- Expanding into new locations or adding to your workforce
- Entering new markets or launching new products or services
- Exploring new funding, mergers, or acquisitions
Seeing the problem: Nothing taints a new venture like past liability. Before you entertain any big event, be clear on how it will impact your company’s ability to be compliant.
Solving the problem: First, start with a clean slate. If you’ve had issues with sales tax or audits in the past, remedy those right away. Then consider if your growth plans could trigger any new obligations and how you’ll deal with those before they become a liability.
5. Put your plan into action
Now that you see value in a sales tax strategy, it’s time to move on to the next phase: Operationalizing Your Sales Tax Strategy. If you need help putting your plan into action, contact us here or call us at 410.685.5512.
This content was written by Avalara, Inc. and provided to Gross Mendelsohn’s Technology Solutions Group for distribution. For more information on Avalara, check out their website at www.avalara.com.
About Sharon Paul
Helping clients use technology to solve tough business issues is what drives Sharon. If she can save a business valuable time by automating a procedure or process, or help them use technology to produce useful information for decision-making, then Sharon feels that she’s done her job. In her spare time, she loves to cook and will gladly swap recipes with you.