Tax & Spend: Be Sure The Spenders Pay The Tax for Better Clients

From the August 2008 Issue

Ignorance of the law is no excuse. It was probably in high school when you
first heard that phrase, or maybe in one of those cop shows on TV as they hauled
the offending party off to jail. The moral was this: It doesn’t matter
if you didn’t know the law or if you forgot it; you’re still bound
by the law.

A Business Lesson In Sales Tax
In business, the penalty for ignorance of the law is more likely to be measured
in dollars than jail time. But those dollars can still add up fast. That’s
what a large parts distributor in Birmingham, Alabama, found out when they forgot
to tack on the additional 1 percent in city sales tax that went into effect
January 1. Fred, the Controller, would later admit he remembered reading in
the newspaper when the City Council approved the new Mayor’s proposed
sales tax increase. He also remembered thinking to himself that he better change
that in the accounting system when he got back in the office after the holidays.

Of course, by the time he welcomed back his accounting team after New Year’s,
the focus was on getting invoices out for all the parts that were being delivered,
and that was a big job. Over the course of the first few days, the company invoiced
in excess of $200,000 for sales out of its Birmingham warehouse. As it was set
up, the company’s accounting system did a great job of charging tax based
on the sales tax schedule assigned to the “ship to” location for
each customer. That schedule is made up of all the municipalities who get a
cut of the taxes paid on each sale. The problem is that when a tax rate changes,
somebody has to go into the system and change the setting.

It was around January 4 when Fred realized the error of his ways. By then,
the company had racked up about $2,000 in sales tax for the City of Birmingham
that had not been collected (but needed to be paid). He pulled aside some of
his team to get on the phone with the larger customers, and they did a fair
job of persuading those customers to remit the difference. They chose not to
bother with some of the smaller sales and just absorbed the difference as another
lesson on the cost of doing business. That lesson was in addition to the time
his accounting team spent calling customers and re-doing invoices.

Across town, a distributor of electronics was having a great new year with
no worries. They never updated their sales tax schedules either, but for them
it didn’t matter. The difference? They were a subscriber to an on-demand
online tax verification service. That meant that every time they processed an
invoice, their accounting system would automatically grab the most current sales
tax rate for that municipality and insert it into the invoice. There was no
need to keep up with tax changes or tax notices, and there was no worry about
accurate tax compliance; that was all part of the service. Don’t you know
how that service paid for itself during those crucial days at the beginning
of the year? But the story doesn’t end there.

Sales Tax Filings! Oh Joy!
The two distribution companies were also different when it came to month end.
Fred and his team were busy with the multitude of sales tax returns that had
to be filed. Their customer base was broad, and each time they delivered to
customers in a new Alabama municipality, that was one more return his team had
to complete. So when the twentieth of the month rolled around, it was time to
put aside the regular work and focus on getting out those tax reports.
For the electronics distributor, the twentieth of the month was just another
day. As part of their automated sales tax calculations, their service also prepared
and remitted all their sales tax returns in Alabama and the other three states
in which they did business: Kentucky, Georgia and Arkansas. As you might expect,
there were no tears shed when the accounting team found out they no longer had
to worry about ever filing sales returns again.

Sales Tax Audits! Oh &#%$@!
The idea of utilizing technology to handle the chore of sales tax has now been
extended to provide assistance in the face of the dreaded sales tax audit. You
may have already heard about SST, the Streamlined Sales Tax that has now been
adopted by 22 states. The current list of SST licensed Certified Service Providers
(CSP) is short: Avalara, ADP Taxware and Exactor, with more to come. CSPs offer
crucial automation options to businesses registering to collect tax under the
approved SST rules. Under SST, companies like Avalara determine and calculate
the sales tax and then report and remit taxes to the states on behalf of those
businesses. It is all done automatically, in real time, completely behind the
scenes. The states love it because it is automated and accurate. And businesses
are learning to love it because if they register to collect sales tax under
SST rules and adopt a CSP’s automated sales tax calculation service, and
if they are in an SST state, they will receive protection from audit, protection
from liability for mistakes in calculation, and may qualify for amnesty. You
can’t beat that. For those of us in states that have not adopted SST,
we still benefit by saving time on sales tax returns.

Some of the other companies in the sales tax calculation and tax return remittance
market include major players like Vertex, Commerce Clearing House (CCH), BNA
and Thomson Reuters. New players, such as SpeedTax, are arising, as well. Each
offering is a different mix of products and services and each integrates with
a different group of accounting/ERP software.

An added plus with these services is the ability to handle “use tax.”
More and more companies buy computers, supplies and other products over the
Internet, and that can be costly to municipalities that fear the loss of the
sales tax revenue. The answer the municipalities found was use tax, a bureaucratic
way of insisting that if you didn’t pay tax when you bought the goods,
you still have to send the equivalent to your local city, town or state. Many
businesses do a poor job of tracking use tax. These tax calculation services
can help with this, as well.

All of these companies and their services, however, share one directive —
to make sales tax calculation and reporting for businesses less time consuming,
less costly and more accurate. You owe it to yourself, your company and/or your
clients, to take advantage of these great tools.