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 likely aware that trying to manage the entire process can get complicated fast. I frequently tell my students and clients that 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 process. And as with many things in the accounting, tax or financial arena, one of the first steps is gathering the right data.

I’ll outline some of the key categories and pieces of data you’ll need to manage the sales tax process. I’ll also explain the 5 categories of data you’ll need to gather, what you’ll need it for, and some examples of the data you’ll need for each of these items.


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 data. 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 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?


2. Data to Complete a Registration Application


If you’ve established nexus for sales tax purposes, you are required to complete a sales tax registration in that jurisdiction. Before you get started on the registration application, you’ll need to gather some data. Here are some of the items you’ll need to take into consideration:

  • Which taxes is the company 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.
  • What is your average annual liability or gross sales or taxable sales
  • What date did the business begin operations in the jurisdiction

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 data 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.


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. In order to do this, you’ll need to gather the right data. A few of the key pieces you’ll need for sales tax compliance are:

  • Sales data, such as the company’s gross sales and taxable sales
  • Procurement data, such as taxable purchases on which use tax is due


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
  • What does your tax calendar look like? How frequently are you filing sales tax 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 higher than what is typically remitted.
Posted on February 15, 2017