Wakefield Research Report: The Executive’s Guide to Sales Tax Risk
Hits and Misses among Industry Peers
This report sheds light on the outlying trends that impact a company’s risk level and demonstrates why company leaders should take a closer look at how sales tax is managed within their organizations. With an eye on the ever-changing legislative landscape, sales tax compliance has become more important—and more complicated—in recent years. This report draws upon a new survey by Wakefield Research, who investigated what leading and emerging companies in the U.S. know (and don’t know) about sales tax as well as how accounting and finance professionals in the trenches are doing to safeguard their organizations from potential audits and maintain compliance.
About the survey
The survey, conducted in October 2014, is the second in an ongoing series, which includes online responses from over 400 U.S. finance and accounting professionals across several industries, ranging from ecommerce, to retail to manufacturing. The survey covered a wide range of topics including the Marketplace Fairness Act or “Internet Tax” nexus, sales and use tax audits, the cost of compliance and more. Companies surveyed have annual revenues of $1 million or more.Major findings from this report are also compared with recent Wakefield Research survey data gathered from companies who automate their sales and use tax compliance with dedicated sales tax software.
What sales tax compliance means for risk management
Risk management is usually top of mind for C-level executives. This is especially true in the areas of finance and accounting, as companies face increasingly stringent standards. Until recently, sales tax compliance, was not a major focus with company leadership. But what’s emerged in recent years is a very difficult landscape, where new sales tax rules at the Federal and State level that determine sales tax liabilities (otherwise known as “Nexus”), are making compliance very difficult. Adding to that complexity are growing state deficits, which are fueling more demand for sales and use tax audits as a means for recovery.
Ignorance is Not Bliss Concerning Sales and Use Tax Compliance
It’s not surprising that nearly half of the survey respondents feel that mastering the Rubik’s cube would be easier than mastering sales and use tax rules. A quick glance at the survey findings indicates that many companies simply aren’t prepared for changing regulations and lack the processes and expertise necessary to be compliant in this legislative climate. On one level it would appear that most companies feel they have sales tax compliance under control. According to the survey, 96% of accounting professionals are confident their company has the correct strategies in place, yet nearly half of the survey respondents believe that an auditor would find costly errors if they were audited for sales and use tax.
Business-as-usual processes are not good enough. The data suggests that many businesses don’t account for sales tax rules correctly—especially companies that sell online and have tax obligations in multiple states. There were close to 14,000 changes to rates and jurisdictions to occur this year in the U.S. alone, (up by nearly 40%) from the previous year, yet 40% of the accounting pros surveyed rely on “existing knowledge” to determine their tax liabilities. In fact, nearly half of the respondents couldn’t remember the last time they updated their sales tax compliance processes.
Risky Business: What the Auditor Sees
The survey found that there are many misconceptions around sales tax audits. One of the most striking is the belief among accounting professionals that if a company fails an audit, it’s only obligated to pay back the erroneous transactions found by the auditor. Truth is, penalties and fees can be applied to all transactions over an entire year as an overall percentage. That makes audits a high risk area for any business. According to the survey, the average audit costs a company more than $114,000 (up 19% from the previous year).
Moreover, more than half of survey respondents are unaware that liabilities uncovered during an audit can affect the valuation of a company.
Costs associated with negative audit findings can wipe out companies’ profits small-to-midsize. In spite of that, many don’t invest in compliance solutions. In fact, 60% of companies surveyed don’t use software solutions to manage sales tax.
Major audit mistakes found in the trenches:
- Missing documents, such as exemption certificates
- Applying the wrong sales tax rates to customers
- Producing the wrong documents requested by an auditor
Take interest in other states, because they’re probably taking interest in you
Nexus (the physical and/or remote presence within a state that defines a tax obligation) is one of the most misunderstood, misinterpreted, and underestimated issues, making it a very common cause of tax problems.
At one time, companies could use a decision by the U.S. Supreme Court in Quill Corporation v. North Dakota (1992) as a guideline. In that case, it was simple: states could not require companies to collect state sales tax unless those companies had significant physical presence, like a warehouse or storefront. But that has all changed.
Now many states have redefined nexus with the emergence of e-commerce, and more and more services are now subject to sales tax. That creates even more tax planning problems and audit risk for companies.
It’s no surprise then that nearly 40% of survey respondents don’t know all of the states in which they’re obligated to remit sales tax—despite the fact that most of these companies sell online. And among those who feel confident in their knowledge of nexus, 89% still operate with misconceptions.
The case for automating sales tax management
There are over 12,000 taxing jurisdictions in the U.S., many of which (e.g., Florida, Texas, California) are now requiring out of state ecommerce companies to collect sales tax for the first time. If federal legislation passes that effectively ends sales tax-free online shopping, the already difficult risk-prone sales tax problem will worsen. The solution? Automating the process with a cloud-based sales tax solution that resides within your business.
There is a reason automated solutions represent a cost efficient and comprehensive solution to the ever-present risk of state audits. They are, in essence, a revolutionary change in a marketplace that has come to recognize a consistent process and predictable workflow for all transactional tax reporting as fundamental to any audit strategy.
Automation is the clearest and best method to graphically display policies and procedures for a competent and, most important, compliant system of sales tax reporting. Organizations can have peace-of-mind knowing that their automated solution meets and exceeds standards that auditors expect from each business. Just as important, automated tax reporting can greatly diminish audit vulnerability-a best-case scenario for every business.
Avalara provides an end to end sales tax compliance model via automation. Instead of researching rates, building tax tables and implementing tax processes, companies simply install a software connector that links their accounting and EPR system to Avalara’s web service. As a cloud software, it continuously updates tax rates, rules and boundaries automatically. At the end of the month, businesses no longer run reports or fill out forms and cut checks and mail them out to taxing authorities.
Avalara is the industry’s most trusted provider of tax compliance solutions, serving more than 40,000 registered users located throughout the U.S., Canada and abroad, delivering more than 350 million sales tax transactions, and filing and remitting more than $10 billion in tax collections per year.
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