Growing your accounting practice, part 2
How tax compliance adds to your bottom line
This four-part whitepaper examines the changing accountancy landscape and takes you step-by-step through the considerations for adding tax compliance to your current array of services to spur growth and evolution in your firm. In Part 2, we look at how adding various tax compliance services, from basic to advanced, to your firm can help kickstart your evolution and increase recurring revenue.
Chapter 2: The compliance opportunity — value-added services
As you consider the right way to expand your practice, consider adding tax compliance as another pillar in your firm’s lineup of services to bring in a new source of ongoing, recurring revenue.
Why expand your practice with compliance services?
There are a number of reasons why tax compliance represents a growing opportunity for accounting firms to expand their practice and to help clients solve complicated problems, including the following:
Every business needs it
Tax compliance is mandatory yet many clients find they are not doing enough or they are doing it the wrong way. There can be many reasons for this. For example, your client may focus on sales rather than administrative paperwork. Or a client may simply be unfamiliar with confusing and changeable tax rates and certifications.
More and more businesses demand it
A growing number of prospects and clients are looking for assistance with tax compliance from accounting/bookkeeping firms, especially younger business owners with growing organizations.
47% of all taxes paid is state sales tax, even more than income tax overall, and it is typically due monthly.
Tax compliance is inherently difficult
Tax compliance is complex for a variety of reasons. There are over 16,000 jurisdictions in the U.S. alone, each with its own tax rates, taxability rules, and filing deadlines that can change constantly.
Mark Magel, CTO, SD Mayer
Omnichannel sales increase compliance needs
Many of your clients sell through an increasing number of channels, including traditional storefronts, ecommerce, and online markets, targeting clients in multiple geographies. The rise of the internet has created new options for clients to distribute their goods and services through their own web properties to clients near and far as well as through third-party online marketplaces such as Amazon, Etsy, and eBay. This makes tax compliance for even the smallest client significantly more complex.
Mathew Heggem, CEO, SUM Innovation
State governments enforce compliance
Virtually all states are looking for additional revenue as budgets are getting tighter. States are not only getting more sophisticated in identifying businesses that do not comply with sales tax regulations, but also tend to expand the scope of what is taxable, increasing the opportunities for bookkeeping and accounting firms to provide tax compliance services.
Compliance brings recurring business opportunity
Compliance is an accounting area that offers you recurring business. Your clients must file on a regular basis, and they often need an expert to assist them. In addition, tax compliance gives a firm the opportunity to package other related advisory services around basic preparation and filing.
To do it right, some firms move in very small steps, adding new value-add services such as tax compliance, while others can handle more sweeping change. Some firms start with selecting a specific technology (vendor) for a new practice area and then build standard services and processes around that technology. Implementing a standard approach around a specific technology enables these firms to grow more efficiently and effectively rather than having to learn, adopt, and support many different solutions.
Tax compliance services from basic to advanced
Many tax compliance services can bring new revenue streams to your business without having to add a single new client and without having to hire any new employees. So, what kind of services can you create around sales tax and compliance to grow your firm?
The first thing to do for a new compliance client is assess where they owe taxes. This is called nexus, which is an obligation to collect and remit sales tax to the state where business is conducted. The rules around nexus not only tend to be complex, they also vary by state and by type of sales or activity. For example, nexus can be created in some states if a business employs temporary workers there or attends a certain number of trade shows.
As their businesses and client bases grow, many of your clients have ongoing needs around nexus. This is an opportunity for you to offer recurring services. As an example, you can offer an annual compliance checkup as a value-added service where once per year you review your client’s activities that may have led to nexus. You may review what has changed, where it changed, and the resulting implications for the client’s business.
Once your clients know where they have nexus, your next step is to assist them with registering for sales tax permits in those states. State rules vary, and some states assess a penalty for not registering in a timely fashion. Managing and tracking registrations is fundamental to remaining compliant. Many clients like to outsource this type of work to an accounting partner.
Sales tax and product taxability
Once you identify a client’s nexus and register them in the right locations, you need to assist them in accurately calculating taxes. Since the sales tax rates depend on the types of products and services sold, you have an opportunity to assist your clients with mapping their products and services to the correct rates. This process is sometimes called product (taxability) mapping. It ensures that the correct sales tax rate is used for the products and services sold by your clients so that your client’s filings are always accurate. This is just one example of the many opportunities around rate determination for your firm to monetize.
Just as important as determining how much tax to charge is determining when not to charge tax at all. Your firm can provide services to help a client identify transactions that are exempt from sales tax. When a purchaser is exempt from paying tax, like a nonprofit organization or a wholesaler, a sales tax exemption certificate must be received and filed. It’s important to verify each certificate is accurate and current. Businesses that fail to verify certificates are cutting a corner that could lead to severe risk.
Preparation and filing
Preparing and filing returns present yet another opportunity for you to be a trusted partner for your client. Like several of the other tasks mentioned so far, preparing and filing can be complicated and time consuming.
Take the example of a small specialized company that manufactures metal siding for the home construction industry. They have offices in multiple states, selling products in retail stores and online. The manufacturer now has potential tax obligations in not only the states with a physical store but also in any state to where they ship their products, each with its own rates and schedules along with nexus and registration rules.
Accurate filing also requires awareness of the different types of transactional tax. In addition to sales tax, there’s use tax. In general, use tax is imposed on transactions that are subject to sales tax, but for which sales tax is not charged. The intent is to capture tax on tangible items and certain services that are sold or purchased by a company or person located out-of-state, particularly if that person or company plans to use, donate, store, or consume those items out of state.
Collection and remittance
Identifying where and how much to remit to each jurisdiction is complex. You have an opportunity to remit to the different jurisdictions and states on behalf of your clients, ensuring timely and accurate payments.
Some firms go beyond these standard areas of compliance to offer more advanced services based on their deep knowledge of state and local tax. Here are two examples.
A state program for businesses that find themselves out of compliance is a voluntary disclosure agreement (VDA). This allows businesses to proactively disclose prior period tax liabilities, sometimes with forgiveness or a reduction of penalties. States offer VDAs to generate future revenue. As part of the agreement, companies must file and register to start complying with state tax laws, i.e., collecting and remitting tax to the state. Your firm can position itself to manage the VDA process and negotiate terms on behalf of clients.
There are various opportunities for you to provide expert audit-related services to your clients. For example, you may engage in reverse audits. A reverse audit is a historical review that usually happens prior to filing a VDA or when an audit is already underway. It can be initiated either by the client or by a government agency, and it helps a client understand the significance of any filing issues. In this case, you can help your client analyze and rectify the situation with proper registrations, filings, and remittances. Another opportunity for your firm is audit defense. When your client is being audited by a government agency, you can assist by analyzing their sales taxes, assessing their compliance status, and making recommendations regarding sales tax strategy and audit defense.
The points above represent real-life opportunities for a growing practice to provide advisory and billable services related to sales tax and compliance. You can create subscription packages of your services that draw on automation to handle basic tasks, freeing up your time to focus on higher value advisory services.
Share your story
Let us know how your firm is navigating the changing accountancy landscape. Or share ideas on tactics not covered here. Please connect with us at A4A@avalara.com.
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