5 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. But with some expert guidance, you can get a much better handle on the “big picture” when it comes to the sales tax administration. And, as with many things in the accounting, tax or financial arena, one of the first steps in administering sales tax correctly is gathering the right data.

We have identified 5 key categories of data you’ll 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 are correctly managing the entire spectrum of sales and use tax administrative responsibilities.

1. Data to Determine Nexus

In the world of sales tax, nexus is one of the first and most important concepts you need to understand. In short, nexus is what determines in which jurisdictions (states, cities, etc.) you are required to collect and remit sales tax.

But in order to determine where you have nexus, you need to gather some information. And with different types of nexus legislation being passed regularly by the states, the types and amount of information you need to be gathering can grow substantially more burdensome.

Once you have the answers to these and other questions related to where you have activities, then you can determine where you have nexus. Here are a few (but not all) of the questions you’ll need to ask yourself to determine your nexus exposure:

• Where do you maintain a permanent place of business?
• Where do you have individuals operating on your behalf?
• Where do you have individuals who refer customers to your business via a link on their website?
• Are they receiving commissions for orders placed via those referrals?
• Do you exceed a specified number of sales in a state?
• What is your total gross sales into each state (including your taxable and exempt sales)?

These last 2 questions are particularly noteworthy at the moment.

The U.S. Supreme Court recently issued a decision in the landmark case 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. But it hasn’t 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 Court’s decision, states across the country are busy enacting “economic nexus” requirements for out-of-state sellers, which includes online sellers. A common threshold for determining whether a seller has created economic nexus is $100,000 in sales or 200 separate sales transactions in a state. If you make sales into other states, it is likely that you need to be gathering this information to determine if you have created nexus. Meaning, don’t wait until for the state to come to you until you figure it out!

2. Data to Complete a Registration Application

If you’ve established nexus for sales tax purposes, you’re next step is to register to collect and remit sales tax in that jurisdiction. Before you get started on the registration application however, you’ll need to gather some information. Here are some of the items you’ll need to take into consideration when registering in a state:

• 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’ll need to determine the taxability of the product or service that you’re selling. There are many questions and factors that go into correctly determining the taxability, but here are a few of the most important questions you should be gathering information on:

• 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’ll need to correctly determine the taxability of your sales to ensure you are charging (or not charging) sales tax correctly on each and every sale. Making mistakes when gathering this information can lead to big problems down the line, come audit time.

4. Data for Compliance

Once you’re registered to collect and remit sales tax in a jurisdiction, it is vital that you stay sales tax compliant. A major part of ongoing sales tax compliance is correctly putting your tax returns together.  In order to do this, you’ll need to gather the right information. A few of the key pieces you’ll need for sales tax compliance and return filing 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. There are some items you’ll want to monitor that will be of interest to management. Here are some of those items:

• 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.
• How many tax returns are you responsible for completing on a monthly, quarterly and annual basis? This can be particularly helpful to report to management if you are regularly swamped with doing tax returns. Reporting this to management may help justify bringing on additional employees to assist with returns.
• 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.

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. See below for additional resources to help you with sales tax administration.