Sales tax is designed to operate as a pass-through levy, thus exerting minimal impact on a company's financial bottom line. Businesses collect the sales tax and subsequently transmit it to the respective taxing authorities—a process referred to as "pass-through." Managing the associated compliance duties does entail costs; nevertheless, the expenses incurred by neglecting compliance procedures are considerably greater. In the event of a failure to collect and remit the required sales tax when obligated, an audit by the jurisdiction would result in an assessment of the outstanding tax along with penalties and interest. This outcome directly affects the company's financial performance unless recovery can be pursued from customers.
Numerous businesses contend that the implementation of economic nexus in 2018 has transformed sales tax into a more substantial burden than its original intent. However, as states persistently report increased revenue from collected sales tax, the likelihood of its discontinuation remains slim. Consequently, businesses must strategize effective approaches to uphold their obligations and maintain compliance.
To aid your endeavors, we have compiled insights into three pivotal components of your sales tax compliance protocol, aptly referred to as the Three Pillars of Sales Tax. Acquiring an understanding of how to incorporate these components into your compliance process will pave the way for success.
The initial pillar, Consultation, represents your foundational step in the process. It centers around comprehending your responsibilities to enable seamless compliance moving forward. Although Consultation is the primary pillar, its facets can be harnessed at any stage in your sales tax journey. It's important to recognize that your sales tax obligations may evolve as your business expands. Therefore, maintaining vigilance over your sales tax exposure is vital, and you might find yourself revisiting Consultation in the future.
The second pillar, Calculation, is dedicated to accurately computing sales tax. This involves correctly applying the relevant sales tax rate to your invoices, taking into account state and local tax rates as well as taxability regulations. For businesses primarily dealing in tangible personal property (TPP), these rates and rules can be managed internally. However, for businesses facing intricate regulations, employing sales tax calculation software could prove indispensable. Tailoring the solution to your specific circumstances is crucial.
The third pillar, Compliance, constitutes a process geared towards adhering to regulations. In this context, "compliance" pertains to filing returns and transmitting collected sales tax. As with much of sales tax, the filing and remittance procedures are not always straightforward. The Compliance pillar encompasses several key considerations:
- Tax data reports
- Tax calendars
- Online versus paper returns
- Notice management
By comprehending and implementing these three pillars—Consultation, Calculation, and Compliance—you will be equipped to navigate the intricate landscape of sales tax compliance successfully.