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Grow Your Business Finances

How to Steer Clear of the Sales Tax Danger Zone

Will Frei, Sales Tax Specialist at Avalara, contributed this article to BusinessNewsDaily's Expert Voices: Op-Ed & Insights.

For many businesses, sales tax compliance is as high a priority as cleaning out the office fridge. Unfortunately the consequences of neglecting the fridge (mold, office resentment, lost sandwiches) are far less serious than ignoring sales tax compliance (audits, penalties, fines). Although most businesses believe they've already got sales tax handled, what they don't know might leave them vulnerable to audit risk.

At the intersection of good intentions and inadequate sales tax compliance efforts lies: The Danger Zone.

With 11,000 tax jurisdictions in the U.S. and thousands of sales tax rate and boundary changes each year, getting sales tax right is nearly impossible for businesses with the wrong tools. But wait, there's more — current changes to sales tax law on both state and federal levels have made it even riskier for businesses to remain in the danger zone.

Facts & Consequences

States want your money.

States hungry for additional revenue are passing laws that require more businesses to collect and remit sales tax.

Fact: New York requires out-of-state businesses to collect and remit sales tax if they make more than $10,000 of revenue in four quarters via links on an affiliate website.

Consequence: Businesses that receive online referrals from websites operated by New York companies need to determine exact revenues associated with these referrals.

States auditors want to find your errors.

States are going to great lengths to target businesses in the sales tax danger zone with tax audits.

Fact: California is sending teams of auditors door-to-door to all California businesses to determine whether they are in compliance with sales tax law.

Consequence: California businesses that are out of compliance with sales tax laws should redouble efforts to follow existing statutes.

Federal legislation could dramatically increase the number of business required to collect sales tax.

Fact: If it passes, the Marketplace Fairness Act of 2013 would grant states the right to require out-of-state businesses to collect sales tax, even if the businesses don't have an in-state physical presence. [Learn More http://salestaxchanges.com/]

Consequence: If the bill becomes law, many businesses may have to collect and remit sales tax in states where they don't currently do so.

A cautionary tale

The well-publicized story of Mattress World, an Oregon-based bedding store, illustrates the potentially disastrous consequences of employing a tax management process that fails to keep up with sales tax law. Mattress World made sales to Washington State customers, without charging sales tax, and utilized a third-party to deliver and then set up the new products.

In 2010, Mattress World was audited by Washington State auditors. Audit findings were negative and included notification that the company's use of a third-party vendor to deliver and set up purchased goods constituted a sales tax obligation within WA State. In other words, Mattress World should have been collecting sales tax all along. The net result? Mattress World owed Washington over $1.7 million, a debt which forced them to close 7 stores. [Learn more about the Mattress World audit.]

Is your company in the danger zone?

The average audit costs small to mid-sized businesses $23,700 and companies that fail to address their areas of risk increase their chances of losing resources to negative audit findings.

Does your company do any of the following?

Sell into multiple states? Businesses selling into multiple states are at greater risk of non-compliance than single-state sellers. The more states a business sells into, the more rules and rates it has to comply with.

Use look-up tables without address validation? Businesses that use look-up rate tables or calculators (i.e., handling sales tax compliance manually) are at greater risk of non-compliance. These tools don't always provide accurate rates and manual processes are prone to error.

What you can do about it

Think your company may be in the sales tax danger zone? Then it is a good time to evaluate your sales tax processes and tools in order to see if they properly handle your tax requirements. You may want to consult an accounting professional to help answer this question.

If you find you are not currently equipped to handle all your sales tax requirements, you might consider outsourcing your sales tax management to a technology solution or accounting firm. Today's technology to help streamline sales tax management and ensure compliance with state and local tax laws gives you more time to focus on your primary area of expertise.

Outsourcing sales tax management can move a business out of the sales tax danger zone, saving time and money and dramatically reducing audit risk.

The views expressed are those of the author and do not necessarily reflect the views of the publisher.

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