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Sales Tax Registration, Voluntary Disclosure & Compliance

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Written by Monika Miles, Miles Consulting Group, Inc. (formerly Labhart Miles)

Registration for Sales Tax:

Once a company determines that it has the requisite nexus in a state such that it is required to collect and remit sales/use tax, it should register with the appropriate state taxing authority. Most states offer on-line resources and forms that can be completed and submitted (either electronically or via mail).

Companies must be aware that one of the questions on these registration forms will require the company to disclose when it began "doing business" in the states. As a practical note, companies should perform a bit of internal research and exercise caution to answer this question (and all others on the form) correctly. If it is determined that the company began doing business in the state much earlier than expected, then it may be prudent to engage in a voluntary disclosure program with the state. (See below.)

Why It's Important: The biggest "sin" a company can commit in the sales/use tax area is to collect tax and not remit it to the state. Sales/use taxes, like payroll taxes, are fiduciary in nature. The company collects funds that belong to the state, and must remit these funds as soon as possible (generally monthly or quarterly). Sometimes a person in the company's accounting department takes it upon themselves to begin collecting sales/use tax, charges it on invoices, and then collects it. Then, if the company is not registered in the state in question, the collected tax has nowhere to go, and ultimately ends up in an account payable. Because of the fiduciary nature of the tax, this could put not only the company, but company personnel at personal risk of prosecution. Therefore, it is very important that if a company does collect sales tax and is not registered in the state, that it become compliant immediately.

Voluntary Disclosure Agreements:

Most states, in their efforts to bring taxpayers into compliance, allow companies to enter into voluntary disclosure agreements ("VDAs") with the state taxing authorities. The advantage to a taxpayer is generally a reduced look-back period (generally 3 to 4 years), abatement or reduction of penalties associated with late filing, and ease of initiating registration with the state. The advantage to the state is, obviously, to add another taxpayer to the rolls. Since states are becoming more aggressive in seeking out non-filers (either through audits of other companies or other means), voluntary disclosure agreements are often a good way for companies to come forward and correct reporting deficiencies.

From a practical standpoint, companies generally enlist the services of a third party consultant to assist in outreach to a state in a VDA. The third party consultant contacts that state on behalf of the taxpayer in a "no-name" situation in order to notify the state that a company wishes to come forward. If, after that time, the company receives a notice from the state for failure to file, the call from the third party consultant affords them the right to proceed with the agreement without incurring the penalties usually associated with failure to file.

Why It's Important: In today's regulatory environment, company executives must be able to identify for their boards and shareholders whether the company has any potential liability for previously unidentified tax exposures. A good example is sales tax. Many companies do not realize that they have exposure in a state (or series of states) due to nexus creation several years before. Reviewing company activities and identifying potential sales/use tax exposure is a first step in correcting the issue. Note that the company can often retroactively collect the tax due from its customers, since, in most states, the customer is usually the one ultimately liable for the tax. (Upon inquiry, the company may find that the customer has already self remitted the use tax to the state.) Once the potential exposure is identified, a voluntary disclosure agreement is a common next step.

Amnesty Periods:

On occasion, a state will announce a limited amnesty period whereby a company can come forward and register and pay delinquent taxes related to the specific period covered by the amnesty program. While on paper amnesties seem like a good idea, there may be pitfalls to companies in coming forward using this mechanism. First, the amnesty may not cover all of the taxes that a company may owe in a state (sales/use taxes, income tax, property tax). So, if your company registers for a sales tax amnesty, for example, you may put the company at risk for non-filing of income tax. A voluntary disclosure agreement might prove the better "one-stop" option. Also, an amnesty may not cover the company's entire exposure time frame. Thus, portions of existing liabilities may still be subject to significant penalties and interest. Before entering into these generally very limited amnesty programs, we recommend to our clients that they do an exposure analysis and choose the best overall remedy to fix their troubled areas.

Sales Tax Compliance (Ongoing):

There are a variety of software programs available to assist with compliance. (See SalesTaxSupport.com's Sales Tax Products Section) For smaller companies, many of the standard accounting software packages offer a basic sales tax tracking mechanism. The larger a company gets, the more significant the number or size of individual transactions, or the more states in which it needs to file, will all help to determine the next level of compliance software.

The important thing for an accounting department of any size is to establish a consistent methodology for identifying when to register in a state, when to begin collecting and remitting the taxes, and then filing the necessary reports. A state will generally require reporting on either a monthly, quarterly, or annual basis, depending upon the volume of taxable sales in the state.

Why It's Important: There are many good software packages on the market to assist companies with their compliance efforts. Alternatively, some companies prefer to use CPA or other consulting firms that specialize in sales/use tax compliance to prepare their returns. In any case, remember that the reports generated will only be as good as the information that is entered into the system at the beginning of the sales process. It is important that when establishing a system, the company correctly identifies its taxable line items, rates, etc. and updates them regularly to maintain accurate reporting.

Maintaining Proper Sales and Use Documentation:

We recommend to our clients that they make certain that they have documentation for all steps in the process: Nexus, exemptions, taxability, etc.

Unfortunately, even in today's "paperless" world, auditors still like to see the underlying supporting documentation, and it is often a piece of paper. We recommend to companies that they maintain a file with all of their current exemption certificates, resale certificates, and any other related correspondence with their customers or resellers.

The same is true for matters of taxability. To the extent a company (or its outside consultant) has prepared any research or documented any positions taken with respect to taxability of a product or stream of income, we recommend that such documentation be available to the person responsible for defending those positions under audit. Keep in mind that different products may be taxed differently in various states. So, if the company is a multi-state taxpayer, the question of taxability must be determined in multiple states.

Don't forget to check the following Sales Tax 101 sections to learn more about sales tax:

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