Avalara surviving sales tax 2014
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Avalara surviving sales tax 2014
- 2. Surviving Sales Tax 2014 Joseph Knowlton Channel Manager, Avalara January 16th, 2014 © Avalara 2
- 3. Introduction Joseph (JT) Knowlton Joseph is a Channel Manager, and most importantly a recovering insurance and financial services executive who joined Avalara in January of 2012. Joseph or “JT” is responsible for the overall success of assigned channel, solution and referral partners and utilizes webinars, public speaking, trainings and one-on-one demonstrations to help our referred clients streamline their financial, tax and invoicing operations. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 3
- 4. About Avalara We’re a team of developers, accountants, support specialists, marketers, salespeople, researchers, and technologists who know we’re onto something big. We know that we are part of a team that is revolutionizing what is a huge drain for businesses big and small. Managing the compliance of transactional taxes, from sales and use tax to 1099s and more. Making sales tax less taxing 4
- 5. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 5
- 6. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 6
- 7. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 7
- 8. Did you know? There are 46 states in the U.S. that charge sales tax. Pop quiz: which states don’t? Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 8
- 9. Sales Tax and State Budgets Sales taxes make up the biggest chunk of state revenues. Source: US Census Bureau, 2012 Census of Governments: Finance – Survey of State Government Tax Collections at www.census.gov/govs/statetax Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 9
- 10. SALES TAX CHALLENGES IN 2014 Same as it ever was, only worse. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 12
- 11. Back to the Future • • • • • • • • Broadening definitions of nexus Changes in product and service taxability Finding the right sales tax rate to charge customers Tracking sales tax holidays Managing exemption certificates Remitting sales tax Preparing for an audit Automating Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 13
- 12. What is Nexus? A “substantial physical presence” which creates the requirement to collect and remit sales tax.* *Quill v. North Dakota (1992) Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 14
- 13. Challenge #1: Broadening definitions of Nexus • Nexus-creating activities – – – – Physical presence (property, headquarters, warehouse…) Holding a business license in a state Attending tradeshows Having independent agents, salespeople, distributors • “Amazon Laws” – Cyber Monday, 2013: SCOTUS leaves NY click-through affiliate law in place – Connecticut Revocation of Special Notice 92(19) Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 15
- 14. Beat the Auditor States are drawing encouragement from recent court actions, like the SCOTUS refusal to hear Amazon’s challenge of New York’s “click-through affiliates” law. Expect more, and far more creative, definitions of nexus and nexus-creating activities in 2014! Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 16
- 15. Challenge #2: Product and Service Taxability • Sales of tangible personal property have historically been subject to tax • And, increasingly, so are intangibles: – – – – Professional services Installation services Specialized training Project-related staff hours • Food, drugs, and clothes – – – – Not on groceries, but on processed food? When is a candy bar candy, and when is it food? Prozac for you, but not for Fluffy? Pants, but not mink coats? Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 17
- 16. Test Your Knowledge • Is this taxable or non-taxable in California? Download Adobe Acrobat 9 Pro Extended https://www.adobe.com/downloads/ Making sales tax less taxing 18
- 17. Beat the Auditor Stay abreast of ever-changing product and service taxability rules, and ensure that you collect sales tax properly! Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 19
- 18. Challenge #3: The Right Rate • Taxing jurisdictions do not follow ZIP codes • Individual counties and municipalities levy sales taxes on top of state rates • Tax rates can vary significantly within a zip code • ZIP codes are: – Too blunt an instrument for calculating sales tax – Error-prone – Misleading Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 20
- 19. Where ZIP Codes don’t help… Making sales tax less taxing 21
- 20. Beat the Auditor Put away generic ZIP code look-up tools. Geospatial mapping can pinpoint any location against each relevant taxing jurisdiction. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 22
- 21. Challenge #4: Sales tax holidays • Specific days when certain products and services (which are normally taxed) are exempted from sales tax – Clothing – School supplies • In 2013, there were 17 states with sales tax holidays • Urban Enterprise Zones, Free Trade Zones, Tax-Free Zones • Expect more tax holidays in 2014 Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 23
- 22. Challenge #5: Managing exemption certificates • Know which customers are exempt, and for which transactions. • YOU are responsible for ensuring that you have valid certificates for your exempt customers. • Keeping track and managing exemption certificates is a difficult and laborious process, but you are not exempted from doing it! Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 24
- 23. Beat the Auditor Zero tax sales are the first focus of an auditor. Have accurate certs, and a process for requesting, managing, and maintaining them. Be able to quickly produce exemption certificates for each zero-tax transaction! Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 25
- 24. Challenge #6: Remitting • Meet filing deadlines • Provide timely remittance • Use the correct forms and formats Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 26
- 25. Beat the Auditor Avoid common errors that can increase your audit risk: • failing to prepay where required • paying late • paying to incorrect jurisdictions Know where your risks lie. Doing everything right won’t prevent an audit…but it will prepare you when an audit happens. Doing everything right will lower your costs, increase efficiency, and free up staff time to generate revenue. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 27
- 26. Challenge #7: Preparing for an audit • First and foremost: collect sales tax properly. • Stay up-to-date with rate, rule, and boundary changes • Document, document, document: – – – – Transaction history Exemption certificates Reports Filings • Remember that your business is not too small or insignificant to draw an auditor’s attention Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 28
- 27. Challenge #8: Automating compliance • Addressing sales tax compliance manually – Is inefficient – Is error-prone – Diverts resources away from revenue-producing activities • Automating and outsourcing sales tax is a strategic move – – – – Improves accuracy Improves record-keeping and reporting Reduces cost Enables re-focusing precious resources on revenue-generating activities Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 29
- 28. Let’s sum it all up • Sales tax compliance is an ever-changing landscape. • Accuracy and solid record keeping are critical. • Keeping up is, for all practical purposes, impossible. • Doing it manually will fail, and failure has real, financial implications for the viability of your business. • You can substantially shift the odds in your favor by taking advantage of the tools that exist to help you. Making sales tax less taxing CONFIDENTIAL & PROPRIETARY | 30
- 29. 10 Tips to Limit Audit Exposure You should: Make sure you: 1. Do a nexus study 2. Stay up-to-date with rate, rule, and boundary changes 3. Report consumers’ use tax 4. Be compliant from the beginning, and always 5. Automate with technology 6. Know your filing requirements 7. Calculate accurately using geospatial mapping 8. Know product taxability 9. Keep comprehensive sales records 10. Automate certificate management More resources available at: www.avalara.com/resources Making sales tax less taxing 31
- 30. End-to-End Compliance Making sales tax less taxing
- 31. Avalara Resources: Learn More 140 characters of sales tax wisdom Testimonials, demos, humor and more Insight from expert contributors twitter.com/avalara youtube.com/avalara1 blog.avalara.com And don’t forget to like us on Facebook! Making sales tax less taxing 33
Editor's Notes
- Imagine you’re a business owner in the downtown core of a midsized town. You come in to work on Monday to find your front window destroyed and the supporting frame around it demolished. It doesn’t take much to figure out that someone crashed through your storefront, and upon first inspection, it’s clear you won’t be able to reopen until repairs are completed. You immediately contact your insurance provider and make repair arrangements. The extent of damage relative to your coverage means the difference between closing your doors and staying in business. Insurance in this case provides real protection against loss of capital and is considered a part of doing business. In other words, the risk of not having insurance outweighs the risk of buying it and never using it. You have some less obvious sources of risk, such as sales tax.
- Imagine you’re that same business owner. You’ve just received notice that you’re being audited for sales tax compliance in just three days. You frantically call your bookkeeper and ask her to start looking through the books for the past 12 months of sales. Your company has never been audited before, but you assiduously record all sales and assigned rates, have always filed and remitted on time and have never been audited before. You keep all of your exemption certificates in a filing cabinet in the back room and have a master spreadsheet of all the rates, rules and boundary changes as they occur in Ohio, where your business is based. You sell online now and again, but nothing significant and all to customers 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 more than good enough. Imagine your surprise when you see a proposed fine of $30,000 for missing exemption certificates, and undercharged sales tax rates on the audit notice!
- Cold sweat on your brow? Breathing shallow and fast? Well, the story doesn’t have to end here. This Survival Guide is not a substitute for professional tax advice, but it is a great place to start creating sales tax management strategies. By understanding the sales tax landscape and developing tactics to address each challenge, you can prepare your company to survive the 2014 sales tax challenge. Not worried about sales tax? Have it handled? Good for you and fingers crossed that your strategies are sound. For everyone else, read on.
- No sales taxes: Alaska, Montana, New Hampshire, Delaware, Oregon
- Sales tax provides critical revenue for states. Other than property and income tax, sales tax is the largest source of tax revenue in the majority of the 46 states that collect it. From a government operations perspective, making sure each and every sales tax dollar is collected, through audits, fines, penalties and well-developed rates and rules, is simply good business. Therefore, recovering uncollected sales tax revenue through greater oversight makes perfect sense, especially given the revenue shortfalls of recent years. It’s easy to see why sales tax is a major source of funding in state budgets, and uncollected sales tax is on the radar of budget-strapped states. After all, wouldn’t you rather be the politician who recovers uncollected funds from existing tax streams, rather than one who votes to raise taxes? Of course, the historically large budget gaps faced by states during the Great Recession only increase the need for sales tax collections. MAIN POINT(S):Sales taxes make up nearly half the average state’s budget revenues, As you can see from this chart from the US Census Bureau, general sales taxes provide nearly a third, on average, of a state’s budget, second only to individual income taxes. If you add in selective sales and gross receipts taxes, which include things like motor fuel sales, alcoholic beverage sales, insurance premium sales, tobacco product sales, and amusement sales, the total collection of sales taxes comprises nearly half of the average state’s budget!
- MAIN POINT(S):Not law yet…but gives a good picture of where things are headedPassed by the US Senate on May 6, 2013, and referred to the House Judiciary CommitteeBi partisan support – including state houses
- If passed by the House and signed by the president, the Marketplace Fairness Act will most directly affect companies that conduct so-called “remote sales,” or sales where the purchaser is located in a different state from the seller. If you conduct remote sales today, you should already be collecting sales taxes in those states where you have nexus. The MFA would now require you to also collect sales taxes in any state where you sell taxable products or services, whether or not you have a substantial presence, or nexus, in those states.There is a proposed threshold, below you which you would not be subjected to the provisions of the law. In the version of the MFA passed by the Senate, if your total remote sales (or interstate) gross receipts for the prior calendar year are below $1Million, you are considered to be a “small seller” under the law, and so, exempt from its provisions.Under the MFA, sourcing for all transactions is considered to be destination-based, unless the purchaser’s address is unknown and a billing address cannot be obtained.One of the biggest benefits of the MFA for sellers, if implemented, is that under the Act, states will be required to provide “a single entity within the state responsible for all state and local sales and use tax administration, return processing, and audits for remote sales sourced to the state,” as well as providing for a single audit of a remote seller for all taxing jurisdictions in that state, and a single sales and use tax return to be used by remote sellers. So, you would no longer have to keep track of all of the taxing jurisdictions within the state, and deal with each one independently.Finally, every state that is granted authority under the Act will be required to comply with all intrastate provisions of the Streamlined Sales and Use Tax Agreement.
- MAIN POINT(S):Nexus is basically whatever a state says that it is, and in many cases, is about more than “substantial physical presence”Every state has the right to define who has to collect sales tax, what those taxes are, and any exemptions that may be allowed. Whether you have to collect is dependent on whether you have “nexus” in a given state.Nexus triggers can include:Traveling salespeopleAgents or distributorsEmployees on payroll AffiliatesTrainingTrade show attendanceDrop shippers / warehousing Servicing tangible personal property (TPP)
- It depends on whether you purchase the software physically or download a copy.
- A lot of sellers rely on zip code tables for calculating sales tax. But this approach is fraught with peril, as zip codes were designed for shipping, not sales tax. Calculations based on zip code are among the most common types of errors found by auditors, and they are responsible for many of the fines levied in sales tax audits of ecommerce businesses.