The 5 Keys to Saving Time and Money on Tax Research

With 47 states that each have their own unique laws governing sales and use taxes, keeping on top of your sales tax rules and requirements on a state-by-state basis is a daunting task even for seasoned sales tax professionals.

But conducting tax research is frequently handled by less senior employees in the tax department. And I’ve seen in many cases that senior staff haven’t taken the time or effort to properly train younger employees on the nuances of tax research. And this can lead to bigger, more costly problems than you might imagine.

First, without knowing how to properly research sales tax statutes and regulations, employees may be finding wrong or incomplete answers and providing management with incorrect information. This can lead to problems come audit time. Second, if employees are conducting tax research in an unorganized, haphazard fashion, chances are good that they are spending way too much time to find answers, which is also a money leak.

Which is to say that a bit of expert advice and training can go a long way towards saving your company time and money on tax research down the line. I’ve conducted countless tax research projects over the years, and my team and I research sales tax issues on a daily basis using a number of different tools.

Through my personal experience and through training employees on how to do tax research, I’ve come up with a systematic approach that will help you find the correct answers to sales tax questions in less time. In my experience, doing sales tax research the right way involves a set of 5 chronological steps. Here’s how my team and I do it:

1. Identify all the Taxability Scenarios

The first step is to identify what your question is and to be specific about each of the taxability scenarios you need to evaluate. If a large number of cases are being evaluated, it may be helpful to organize them into groups that have the same facts or are in the same category. Be sure to include all details that could affect the taxability of the transaction. And make sure to use any existing knowledge, including prior research projects you or your team has conducted, as a starting point for researching the new scenarios.  You’ll also want to gather a list of ideas or keywords that can be used in the research – think of every variation you can so you have better results with your search. For example, if you need to know the taxability of software maintenance contracts –  that is too broad.  You need to break it down into canned or custom, mandatory or optional, tangible or electronic delivery, bundled or separate and even what type of application and whether any other exemptions might apply.

2. Begin the Research

Now that you know what you have to find the answer to, you can start your research. The next step is to identify the research tool that you’re going to use. Do you have access to a commercial (paid) tax research tool? Or do you need to rely on free tax research resources? If you have access to a paid tool, the ease of use and reliability of the information can be invaluable.

You’ll also want to evaluate how many different taxing jurisdictions are involved in your research. And you’ll want to determine how standard the issue is that you’re researching. For instance, are there unique items that can change the taxability determination?

When you are researching you also need to determine what types of sources you want to include.  Are you looking for the law or cases or maybe specialists’ interpretation on the matter?  If you are looking for the law – then be sure you are researching the law – the actual statutes passed by the legislature.  Regulations are the department of revenue interpretation and commentary and articles are people’s interpretations.  All of these sources can be beneficial but you need to know what the purpose of your research is to know which is the most relevant and important.

3. Make Your Taxability Decisions

Once you’ve conducted your research, you’ll need to make the determination of whether the product or service is taxable or exempt. You should also identify what circumstances may change this determination. If you’re having difficulty making the taxability determination, remember that seeking outside help is an option. You can also request a private letter ruling from the Department of Revenue if precedence hasn’t been established for your situation.

4. Communicate Your Results

Make sure the appropriate people in your company are aware of the results since they affect the company’s bottom line. You’ll want to identify the individuals who will be using your research results. You should also evaluation different formats to communicate the results, so you can determine how the results can most easily be evaluated and understood. For example, if you are researching the taxability of items you buy for your Accounts Payable department to use in reviewing vendor invoices, a matrix with clear decisions is probably the right delivery method.  But if you are putting together your position for a protest of an audit for your tax director, a well thought out detailed analysis in a memo is a better choice.  As with any research project, also make sure to retain copies of all research you used, so you can justify the decisions or determinations you’ve made. Sources get updated online and so if you need to go back and find what you relied on, it might not exist in a year!

5. Take the Necessary Action Steps

Now that you’ve conducted the research, put it to use! You can help your company reduce costs by creating and acting on tax strategies based on your research findings. If your company uses tax software, have them update the configuration rules to reflect proper taxability. And continue to track hot topics that may affect your company down the road.

Sales and use tax research should be an ongoing project at your company. At the Sales Tax Institute, we conduct tax research on a daily basis. Sales tax laws change and evolve over time, so it’s important to make tax research or at least reading about tax changes part of your regular routine.