With an estimated 7,500 state and local taxing jurisdictions and the complexity of state and local sales and use tax laws and regulations in these different jurisdictions, ensuring that your company is in compliance with these laws and regulations can be a difficult task. Recent research suggests that there may be as much as $26bn in uncollected sales & use tax from e-commerce transactions alone. In an attempt to recover some of this uncollected sales & use tax, state and local taxing jurisdictions are increasing compliance activities and attempting to expand what constitutes business presence in their jurisdictions.
In this increased compliance environment, companies need to be proactive rather than reactive in the area of sales and use tax compliance. The time to prepare for a sales & use tax audit is before an audit assignment is received. To prepare for a sales and use tax audit, companies need to conduct a thorough assessment of their business activities to determine in which taxing jurisdictions they have a compliance responsibility. Once that has been determined, the company needs to establish policies and procedures to ensure that they are in compliance with all applicable laws and regulations in those jurisdictions where a sales and use tax filing responsibility exists. To ensure compliance and reduce audit exposure, it is important for companies to maintain and leverage sales & use tax domain expertise, whether in-house or through a third-party professional services provider.
Following is a list of best practices that can be adopted to ensure adequate sales and use tax compliance and minimize potential adverse audit assessments.
Sales & Use Tax Best Practices
- Be proactive rather than reactive in sales & use tax compliance
- Perform nexus study to determine in which jurisdictions registration is required
- Review business activities to determine taxability of products and services in applicable jurisdictions
- Register to collect and remit sales & use tax in all applicable jurisdictions
- Automate workflow from taxability determination to tax remittance to ensure timely and accurate compliance
- Automate tax rate updates to ensure accurate tax calculations
- Document exempt sales and maintain exemption certificate documentation
- Research all tax notices and audit findings to confirm validity
- Stay current on laws and regulations