6 Data Points You Must Measure to Win at Sales and Use Tax Administration

If you have any experience working with sales tax, you’re aware that trying to manage the entire process can get complicated fast.

Sales tax is a team sport – you can’t do it on your own. Sales tax departments need to collaborate with and gather data from other departments like sales, manufacturing, and distribution to get a handle on the “big picture” when it comes to sales tax administration. As with many things in the accounting, tax, and financial arena, one of the first steps to administer sales tax correctly is gathering the right data to make decisions.

We have identified 6 key categories of data you need to successfully manage the sales tax administration process. Within each of these categories are crucial pieces of information that you may not be aware of – information that you need to gather to ensure that you correctly manage the entire spectrum of sales and use tax administrative responsibilities.

1. Data to Determine Nexus

Nexus is one of the first and most important concepts you need to understand in the world of sales tax management. In short, nexus is the level of connection between your business and a taxing jurisdiction and is what determines in which jurisdictions (states, cities, etc.) you are required to collect and remit sales tax.

In order to determine where you have nexus, you need to gather some information. The types and amount of information you need will vary by state and depend on which types of nexus legislation the states have enacted. In all states that have a sales tax, physical presence is the first consideration for determining nexus. You need to know where your company has property in a state or people acting on the company’s behalf in a state.

Beyond physical presence, you must research which types of nexus legislation you must comply with in the states you do business: economic nexus, marketplace nexus, click-through nexus, affiliate nexus, and reporting requirements legislation.

Here are a few (but not all) of the questions you need to ask yourself to determine your nexus exposure:

• Where do you maintain a permanent place of business? (physical nexus)
• Where do you have individuals operating on your behalf? (physical nexus)
• Where do you have individuals who refer customers to your business via a link on their website? (click-through nexus)
• Are they receiving commissions for orders placed via those referrals? (click-through nexus)
• Where do you hold a substantial interest in, or are owned by, an in-state retailer and the retailer sells the same or a substantially similar line of products under the same or a similar business name, or the in-state facility/employee is used to advertise, promote, or facilitate sales to an in-state consumer? (affiliate nexus)
• Do you exceed a specified number of sales in a state? (economic and marketplace nexus, reporting requirements)
•  What are your total gross sales into each state (including your taxable and exempt sales)? (economic and marketplace nexus, reporting requirements)
• Do you make sales on a marketplace (like Amazon, Etsy, or eBay)? (economic and marketplace nexus)
• Is your company an online marketplace facilitator? (marketplace nexus)

The last four questions are particularly noteworthy in light of the sales tax landscape resulting from the Supreme Court’s decision in South Dakota v. Wayfair. The Court’s decision struck down the physical presence requirement that was the previous standard bearer for determining whether a seller has nexus in a state. However, it has not eliminated the need to determine if you have physical presence in a state. That will still create nexus – regardless of your sales into the state.

In the wake of the Wayfair decision, states across the country have enacted economic nexus and marketplace nexus requirements for out-of-state sellers, which includes online sellers. Both economic and marketplace nexus legislation set sales thresholds that sellers or marketplace facilitators must exceed to create nexus in a state.

You must continually track data regarding your sales levels, both dollar amount and number of transactions, in the states where you do business to determine if you have created nexus. A common threshold states have set is $100,000 in sales or 200 separate sales transactions.

2. Data to Complete a Registration Application

If you establish nexus for sales tax purposes, your next step is to register to collect and remit sales tax in that jurisdiction. Before you get started on the registration application, there are some key pieces of information you need to gather. Consider these items:

• Which taxes are you required to collect or pay? Some states differentiate between sales tax, seller’s use tax, and consumer’s use tax on both their registration application and return. How you register can impact the return you are required to file as well as the tax rate you’re required to collect.
• What is your average annual liability? This information is used by the state to determine your filing frequency, so you’ll want to read the forms carefully to gather the correct information.
• What date did the business begin operations in the jurisdiction? This information is used by the jurisdiction to determine if you have returns due for prior periods.

The information you submit on a sales tax registration can have far-reaching implications for your administration and compliance, so you’ll want to pay special attention to the questions that are asked and gather the correct information as needed.

3. Data to Determine Taxability

Next, you need to determine the taxability of the products or services that you sell. There are many factors that go into correctly determining the taxability. Here are a few of the most important questions that will help you determine the correct taxability:

• What are you selling? Is it tangible or intangible property? Personal or real property? Are you selling a service? The answers to all of these will help determine whether you are making taxable sales or not.
• How will the product or service be used? Will it be used in a taxable manner or is the purchaser an exempt organization or individual who can make the purchase tax-free?
• What does your invoice or contract look like? If you aren’t separately stating taxable and non-taxable items on the invoice or contract, you may be unnecessarily making your exempt sales to sales taxable.

Gathering the information to answer the above questions is one of the most critical steps in sales tax administration and compliance. You must know the taxability of your products and services in order to charge (or not charge) sales tax correctly on each and every sale. Misclassifying the taxability of your products and services due to mistakes in gathering the necessary information can lead to big problems down the line – especially in the case of an audit.

4. Data for Compliance

Once you register to collect and remit sales tax in a jurisdiction, it is vital that you stay on top of processes that keep you compliant. A major part of ongoing sales tax compliance is correctly putting your tax returns together. A few of the key data points you need to file accurate returns are:

• Sales data, such as the company’s gross sales and taxable sales. When determining the taxable sales (which is gross sales minus deductions), keep in mind standard deductions such as sales to exempt organizations and sales for resale.
• Procurement data, such as taxable purchases on which use tax is due. Note that this information may be reported on a separate consumer’s use tax return or just on a separate line of the sales tax return.

5. Data for Management Reporting

As part of your duties in the tax department, it is very likely that you need to submit reports to management. To demonstrate the importance of the sales tax department’s work and the impact on the company’s finances, there are some key items you should monitor:

• The amount of sales tax paid in a jurisdiction. This can be a very important piece of information if your company is trying to negotiate a credit or incentive. There are two parts to this. One might be easier and that is the amount of sales tax you collect on your sales. The other, which might be much more difficult, is figuring out how much sales tax you pay on things your company buys. This would be any consumer’s use tax remitted, but don’t forget about tax paid to vendors. This can really be helpful in any incentive opportunities but also challenging to identify. Processes in accounts payable to identify tax paid to vendors can be helpful to gather this information. 
• Exemptions savings. When you find a new exemption, don’t just calculate its savings for the year – project it 3-5-10 years in the future. This can be especially helpful if you find an exemption your company could qualify for with some changes to processes or operations. Demonstrate the long-term savings for doing the work necessary to qualify for the exemption.
• Trends. Make sure you are monitoring data for any discrepancies or irregularities, such as an amount of sales tax in a period that is much higher than what is typically remitted. This sort of irregularity may be due to an unusual transaction happening in the period or perhaps there was a data entry error. In any case, investigating the cause of the discrepancy is important to determine if any corrective steps need to be taken.

6. Data for Staffing

As your company’s business grows, sales tax responsibilities grow in tandem. You may reach a point where the work necessary to keep your company compliant exceeds the capacity of the sales tax department (particularly if you are a department of one!). Here are some questions to ask yourself to determine if extra hands are needed or how responsibilities may need to be shifted.

• How many tax returns are you responsible for completing on a monthly, quarterly, and annual basis? If you are regularly swamped with doing tax returns, reporting this to management may help justify bringing on additional employees to assist with returns.
• How many exemption certificates do you manage? How many states are you registered in? Check in with the person managing these things, are they able to keep up? See if there would be an ideal number of certificates or states to manage that allows the team member to stay on top of them and their other work. If there’s an excess, is it enough to start shaping a new position?
• How many different industries are you in? This answer will often determine how many tax types your company must support. More tax types mean more employees may be needed.

Gathering data on these questions can help you build the case for the additional resources your department needs. Present your data to management to discuss the right option for your company, whether that’s additional in-house employees or outsourcing certain parts of your sales tax compliance, like monthly returns.

Next Steps for Mastering Sales Tax Administration

Gathering the right information is just one key piece of the puzzle when it comes to sales tax administration and compliance. Staying on top of sales tax administration can be overwhelming, and some expert advice can go a long way in getting a grip on your responsibilities.