[Master Class] How Sales Tax Compliance Can Help or Hinder your Success

Author: Hayley Richardson | Categories: Master Class Series, Taxes
small business sales tax compliance

small business sales tax compliance

This post is part of Acuity’s Master Class Series, dedicated to shedding light on financial and other influential industry topics. Our goal is to provide a deeper understanding to the business community to empower their strategic decisions.

What is Nexus and why should you care?

Nexus is the term used to describe the connection a company has with a state that requires them to comply with sales tax laws. While purchasing physical goods from a store in say, Atlanta, Georgia is straightforward, the rise of e-commerce has made sales tax anything but simple. Establishing physical presence and determining whether sales tax is required can get sticky. That’s why we’re turning to the experts for their enlightening advice.

We recently sat down with John Corn, Principal at Frazier & Deeter, the fastest growing accounting firm in the southeast to discuss sales tax, Nexus, and how to make sure your business is compliant. Here are highlights from the Q&A.

Before we begin, tell us a little bit about Frazier & Deeter as a firm.

We are headquartered in Atlanta, Georgia and are one of the largest firms in Georgia. We have offices in Alpharetta, Tampa, Nashville, Philadelphia, and now in Las Vegas. We really can do anything on the same scale that the big 4 firms can do. As full service CPA players, we have public companies, private companies, non for profits, real estate, startup, and technology. We handle the full sweep.

Tell us a little bit more about your practice line specialty.

I’m full time in state and local taxes (“SALT”). That’s my area. I’m more of a consultant than a tax preparer, and I lead the SALT practice for our firm. I’m a SALT generalist in that I have experience and knowledge in the areas of income tax, sales and use tax, credits and incentives, and property tax. We also advise companies on certain types of local jurisdiction license fees and business taxes in the areas. In most areas of the company, we give assistance for state and local taxes.

What has changed the most in the market around sales and use tax today? What is continuing to change?

The laws were always structured to allow the brick and mortar dealers to collect sales tax from the customers. Dealers now are both brick and mortar and virtual with internet sales. They’re mobile and difficult to identify what state the transactions take place in. If you go back and look at sales tax for non brick and mortar stores, a lot of the policy was established off the old catalog sales model. What has changed over the years is that dealers have become virtual, and we have a lot of sales of services along with the sales of tangible personal property. How can states tax those services? We’re seeing a variety of transactions today, and while they used to be straight forward, transactions are more complex now.

What types of businesses are you spending your time with these days?

That’s the beauty in being a SALT consultant. You can spend time with anyone from a startup company, that’s not even generating revenue, to some company with $5 billion in revenue a year. A lot of my work right now has been related to companies that are in growth mode. I’m doing a lot of work with companies helping them determine where they need to be complying with state taxes, and we do that with Nexus Nexus reviews. It has been a huge piece of our business.

How do you describe what Nexus is and how it impacts a smaller business?

The earlier SALT policies and court decisions defined Nexus in that you have some sort of physical presence, a physical presence established within a state before they tax you. These policies remain in place for income taxes, but there’s been a lot of change in policy from different court decisions. For franchise taxes, business privilege taxes, and sales and use taxes there are now factors dealing with economic presence within a state. For example, the Amazon case in New York.

It is the Wild West right now with states trying to find ways to take their policies and modify them to still meet constitutional provisions and established policies in place, as well as grab more taxpayers into their state that have an economic presence there. Where I get involved with a lot of companies is when they are tap dancing in and out of states trying to test the market out, before they know they’re going to or have established a presence there creating nexus. That’s why a lot of times you do Nexus studies; you’re actually doing a risk assessment.

How would a Nexus study benefit a growing company?

There’s a wide array of business industries, and they’re more complicated than they used to be. We have to look at a lot of doing business activities as well as how they’re structured in corporate entities, and then we go into our state policies and experience. We have to help make a determination if we believe they have Nexus. The standards for Nexus are different for income tax then they are for sales tax. The Nexus study is very important to have. If you have a company that is planning a some sort of significant transaction, there could be a service firm performing due diligence. For example, I represented a seller just last week. They had grown exponentially over the last years. Fortunately during the Nexus study, we were prepared to handle a lot of the questions and concerns that came up on due diligence. It was good to have that nailed down before they went into it, that way if we find a liability that could be a contingent liability, then we went ahead and did the estimate of it and had a mitigation plan in place for it.

Without giving any specifics of that transaction, what are some of things found in a Nexus study that business owners or clients would be surprised about.

One of the biggest areas we’re finding that people are surprised at are those companies that sell software as a service (“SaaS”). They don’t realize that SaaS is taxable in several states. It’s like the sale of tangible personal property. A lot of times there could be a component of hardware that has to be installed in that system to make the system work. They’re going to find out that they have Nexus. We do a lot of consulting in that area to identify potential issues.

How are states being aggressive in the area of SaaS? Would you expect to see more and more states follow suit?

I would, especially states that are not really trying to target that industry as a home base. SaaS is not taxable in California, and you can imagine why with Silicon valley there. But then again, Texas with all the technology around Austin, Texas taxes SaaS. It depends on the lobby in these states. Yes, I think the trend is going to increase. Tennessee joined the bandwagon about two years ago. We’re going to see more and more states tax SaaS as though it was sold as tangible personal property.

What’s the process look like if someone makes a mistake and doesn’t handle sales tax compliance correctly?

There are different sources states can use to identify noncompliance within a state. We see a lot of it could be they have an audit with an existing client. In the process of doing the audit, they see that someone should have collected taxes but didn’t. I need to go visit that company because that company is not complying. There’s a lot of public information, and the states are buying data mining.

The states are very subtle on how they will approach taxpayers that aren’t complying. If they have information, if they believe you’re doing business in their state, they’ll start out by sending a nice letter and that will include a Nexus questionnaire. Maybe it will be a three-page document, and you will need to disclose everything about what you’re doing. It’s very detailed. One of the first questions I get from a lot of my clients is, “Is it legal for them to do that?” I’m like, “Yes because you’re doing business in their state.” Then they’ll say, “Well what happens if I just avoid this questionnaire?” Well what they’re going to do is they’ll pull a number out of the sky, and send you a notice and say, “You owe us this tax.” They’ll base it off of data mining information or some of the other information they may have in their system or that they’ve identified out of the public domain. It’s best to work with them when they initially contact you and get someone to help you that has experience in SALT.

When is the right time to engage you or someone for help with sales tax compliance?

Well I would say right now.. If you’ve got an accounting system in place, and you can’t even track where your revenues are going by state, then we have a problem. If you know you’re selling to customers outside of one state, I would consider looking at it just from the accounting record side of it. From there, you just have to look at where you are deriving revenues to know where you are at risk. That’s really fundamentally the first thing.

What is the benefit of having a trusted CPA?

I try my best to be a trusted business advisor. A lot of times it’s a matter of getting acquainted with this company and learning what they’re doing. I’m not charging you anything until I understand what your business does. If you buy a car, and you change the oil per what the manufacturer’s specifications are on that regular schedule, you’ll probably get two to three hundred thousand miles on that car without an issue. I think an accountant has to be like an oil change. You’ve got to get a checkup occasionally, and we can’t just do that through calls and emails. It’s a matter of relationship and trust.

If your tax CPA is not taking those efforts to know you in a personalized way, they’re not going to have a good idea about where exposure may lie or where you have opportunities that are going uncaptured. It’s all about the personal experience to help you succeed. Looking for more helpful business content from subject matter experts? Sign up for Acuity’s monthly email newsletter.

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