ENGINEERED SALES TAX SERVICES

The answer to any general sales/use tax question is “It depends.” Each state has its own unique laws regarding what is taxable, what is non-taxable, and what exemptions exist. In general tangible personal property is taxable, but states often include items such as software, digital goods, electricity, and other intangible items within their definitions of property that is subject to tax. In other instances an item (such as software) might be taxable if provided on tangible media but non-taxable if delivered electronically. In contrast to tangible personal property, services are usually non-taxable unless a state has specifically identified the service as one that is taxable within the state. While a handful of states tax nearly all services, the majority are selective in what is subject to sales/use tax but the range of taxable services is broad. For example, dry cleaning, landscaping, security, telecommunications, information services, and employment services are a short list of possible taxable services. When combined with tangible personal property such as the case of repairs to equipment, the taxability can vary from one state to another and can also be dependent upon whether or not the charges for labor are separately stated from any charges for materials or repair parts. Solutions for taxability needs can be as simple as an answer to a single question or far more complex and detailed such as a tax matrix including various products/services and numerous states. My goal is to simplify the complexities of the laws and provide simple, clear answers and solutions for your operations.

Navigating a sales/use tax audit can be a daunting experience. Understanding the laws relevant to your business, documentation that will be required or accepted, and the overall process and methodology is extremely important. A lack of understanding can result in unnecessary time and/or tax assessments. Furthermore, the audit can be a drain on internal resources. Most businesses who have never been audited are surprised to find out the state will not only review sales but also purchases. In fact, most businesses and individuals are unfamiliar with the concept of use tax and having to remit tax owed on purchases. Often times in sales/use tax audits this can be where the majority of the tax exposure exists. Having an experienced professional manage your audit allows you to focus on your business and provides the comfort of knowing your audit is being handled by someone knowledgeable in the field. Regardless of the overall outcome, I believe a business should learn from the experience which is why I also make it a point to educate clients throughout and after the process on aspects that impact the business.

Nexus is some level of connection that allows a state to subject a business to taxation. Nexus standards can vary from one state to another and there are also differences between sales/use tax and corporate income/franchise tax. The historical standard was that some form of physical presence had to exist before a state could require a business to collect and remit sales tax in the state. What most businesses are unaware of is that physical presence need not be permanent, and it’s often the temporary or transient presence that creates an issue. Aside from a permanent location such as an office or warehouse, the most common trigger of physical presence is sales employees or representatives traveling into a state to solicit sales. Other activities such as delivering into a state with company vehicles, providing services such as training or repairs, maintaining inventory in a third party warehouse or distribution center, having a related entity operating in a state, or having referral affiliates in a state can create nexus. The most significant development in decades for sales/use tax nexus occurred recently in the U.S. Supreme Court Decision of South Dakota v. Wayfair. This decision has led to an economic nexus standard for sales/use tax. Remote sellers who have no physical connection to a state may now be required to collect and remit sales tax in a state if the business exceeds certain thresholds based on a sales amount or number of transactions. As is the case with most sales/use tax issues, the requirements and thresholds vary by state but the most common standard being applied is either $100,000 of sales into the state or 200 or more transactions sourced to the state. Despite the changes regarding economic standards, the physical presence standard is still relevant and applicable. It’s very important that each business understand if it has nexus in a state and if so, whether that’s due to physical presence or a result of exceeding economic thresholds. I regularly work with clients to help identify where they have nexus, and then help them create a state by state strategy to resolve any liabilities and to maintain compliance moving forward.

If it’s been determined that your company has not properly collected tax there are numerous possible solutions for resolving the issue. I operate under the philosophy that a company cannot determine the best solution until it understands the full scope of the problem. Furthermore, each business is unique in terms of available capital, resources, and systems that can be dedicated to the matter, as well as overall comfort level and tolerance for risk. Often done in conjunction with a taxability and/or nexus review, I can quantify the sales tax exposure based on taxability, customers, exemptions, etc. and help determine a path forward based upon your needs and concerns.

Voluntary disclosure agreements can be one of the best solutions for resolving outstanding sales/use tax liabilities. In exchange for voluntarily coming forward to remit tax owed, a state may execute an agreement providing certain benefits to the business. While the requirements and benefits vary by state, in general the lookback period to be considered and reported will be limited to the respective state’s statute of limitations, typically 3 or 4 years. In addition, under a voluntary disclosure agreement a state typically waives penalties associated with the delinquent tax and in some cases all or part of the interest. It is imperative to understand the steps and approach for each state so a company does not jeopardize its ability to take advantage of this opportunity.

When buying or selling a business it’s critical to understand if the business has been correctly reporting sales/use tax. Buyers should understand what liabilities might exist which could be costly after the acquisition. Nearly every state has successor liability laws for sales/use tax and what many businesses and M&A advisors fail to understand is that the structure of the transaction (asset or stock transaction) is often irrelevant for sales/use tax successor liability. Sellers need to confirm and/or refute potential liabilities identified by a Buyer, or risk a decrease in valuation and/or funds escrowed and reserved for future tax assessments. I have experience working with private equity and venture capital firms, attorneys, and directly with business owners during the due diligence phase of a transaction.

I work with clients to create and deliver sales/use tax training presentations to further educate personnel on matters that most impact their business. Rather than provide general industry information, I visit with clients first to identify the relevant and critical issues and then craft a presentation specific to each client’s needs. I also work with each business to identify which personnel should be included in the training. While tax is generally regarded as a function of the accounting department, often times it is equally important that other functions and departments such as sales, estimators, and project managers undergo training and understand the impact that sales/use tax can have on the company.

Beyond client training, I have also presented numerous sales/use tax training seminars to trade associations and CPA firms. Speaking engagements can be customized in terms of duration and topic. Subjects can range from very specific matters to a general introduction to sales/use tax, and if needed presentations typically qualify for CPE credit.

When doing business in a state a company should understand its registration requirements. Having familiarity with each state, I can complete and submit the applicable registration forms to obtain a sales/use tax license with the Department of Revenue/State Taxing Agency and to qualify the business with the Secretary of State.

Filing sales/use tax returns can be a cumbersome and time consuming process. As with everything else regarding multi-state sales/use tax, understanding each state’s reporting requirements involves having familiarity with each state’s system and return. A business should consider outsourcing this function to free up resources and reduce risk for error. I also recognize that even with correct systems, processes, and properly trained personnel, mistakes can be made. While preparing returns I look for abnormalities or possible errors in data and work with clients to correct the matter prior to reporting. For many clients an automated system can certainly make sense and I partner with several companies that offer such solutions.