I recently found myself speaking to a company about sales tax outsourcing. They were overwhelmed with the many, and varied, requirements for registering, collecting, and remitting sales tax. Like so many aspects of sales and use tax there are shades of gray in most every decision. Decisions often get made based on risk and cost.
Here’s an example: A telecommunications service provider operates in a handful of states with a small footprint of activity in California. For those of you that aren’t involved in the taxability of telecommunications services on a daily basis, there are some unique taxing rules in California and particularly at the local level. Many cities in California have a utility users tax that applies to telecommunications services. The tax is a small percentage but one that applies nonetheless. To complicate matters, each city generally requires a separate return and payment each month. The dilemma for this company is that they could have pennies or dollars per-month of tax in these individual cities where the cost of complying (collecting, filing, and paying) far exceeds the tax dollars. Why spend $100 to collect and remit $1 in tax?
While this situation is specific to a telecommunications company operating in California, the principals apply to all industries and jurisdictions. Veterans of sales tax compliance are used to making risk-based decisions and consider the risk profile of their business, the cost of compliance, and other mitigating factors. Small and mid-sized businesses that lack internal sales tax expertise may not be as comfortable or adept at making these decisions.
Generally speaking, most companies are comfortable assuming some level of risk rather than have the expense of 100% compliance. Take the example above, an acceptable answer may be to collect the tax on the transactions but wait until a predetermined threshold of tax is accrued, and or a limited amount of time has expired, before registering and remitting. This helps minimize the cost of compliance and recognizes the company is taking some level of risk. (As a side note, this is not statutorily correct so please seek your own tax advice.) This type of strategy works very well for some businesses but I’ve talked with other more risk-adverse businesses that register and file the moment they collect a single penny in a jurisdiction. This is a perfectly acceptable answer also depending on your risk profile.
What’s your risk profile? Are you willing to assume some level of risk to minimize your cost of compliance? How does your sales tax outsourcing vendor help you manage to your risk profile?