Nexus — the connection between a company and taxing jurisdictions that triggers sales tax liability — gets thornier faster your grows. surprisingly, more revenue can mean complexity potentially greater risk of audit (money, problems?).
Here are 5 areas of sales tax risk relating to business growth and what you can do to address them:
Entering new states
With every geographical expansion, particularly entry into new states, a company needs to master the particular rules of that jurisdiction. Given the number of jurisdictions nationally (11,000) and the number of sales tax rate, rule, and boundary changes annually (greater than 100,000), learning the new sales tax rules in the new state is difficult. Most companies start with the relevant department of revenue, map it to the location of the sale and extrapolate rates from there. As your business grows, running these determinations from a master spreadsheet that doesn’t integrate with your current systems isn’t realistic.
As you enter new states be sure to register in the states where it is required, determine where your company has nexus, and refer questions to your trusted advisor.
Bringing new products to market
Offering a new product? Good for you! Be sure to study the implications of new products on your sales tax liability. When it comes to tangible goods even straightforward products like grocery items can be taxable based on ingredients, or intended use. Product taxability is complicated and as your list of products grows, so does the number of opportunities to get sales tax wrong.
What one state considers taxable another state may not. So as you bring more products to markets in more places, your sales tax compliance burden grows. A great example of this complexity is the taxability of cloud-based products such as software, music, and movies.
As you introduce new products research each by type and category and individual taxability. Fully research which products are exempt because of product, end-use, transaction, or holiday.
In today’s world, plenty of businesses decide it’s a smart decision to begin to sell globally. Selling into the EU, for example, for an ecommerce business based in New York, might seem like an easy way to expand market reach. For many U.S. companies, however, VAT (Value Added Tax) can be tricky and prone to error.
Smart companies often turn to contract workers when there is a spike in demand or projected growth. It is an excellent way of increasing capacity without committing to fixed costs. Unfortunately, this flexibility represents a compliance risk.
Managing the hiring and documentation for contract workers presents several points where errors are common: 1099s and W-2s can have incorrect addresses, social security or TINs, or other errors that will trip up reporting to the state and federal agencies.
Without a bulk validation tool, companies are exposed to increased audit risk by virtue of incomplete or missing 1099s.
Failure to upgrade your ERP
Companies are often reluctant to undertake adopting a new platform or technology, such as an ERP. Unfortunately, the nature of business growth often necessitates a closer look at legacy systems and their ability to manage specific elements such as sales tax risk.
Growth necessitates raising expectations of ERP functionality and comprehensiveness. Without modules to manage sales tax risk, your tax department can be left holding the bag when the auditor comes knocking.
Growing a business is complex and demanding. Without managing the sales tax risks engendered by this growth, success might breed errors and audits that undercut the bottom line. Turning to an automated system is one way to shore up compliance as your company expands.