Sales and use taxes can be some of the most complicated tax obligations many companies face.

To correctly collect and remit the tax in each reporting period, companies must apply detailed transaction-by-transaction analysis. The complexity of this approach, coupled with the ever-changing sales and use tax environment, can make it challenging for even the most sophisticated companies to stay fully compliant.

That said, it’s important to get this process right the first time—incorrect reporting can expose companies to hefty penalties and administrative burdens.

Below, gain insight into the three most critical sales tax compliance challenges many companies face as well as key steps to plan for them with confidence:

• What Is Sales and Use Tax Compliance?
• What Are Some of the Common Risks with Sales and Use Tax Compliance?
• Why Is Accurate Sales and Use Tax Compliance Such a Challenge?
• How Can You Stay Up to Date with the Forms, Deadlines, and Filing Requirements?
• What Internal Processes Can Help You Remain Compliant?
• Can Your Company Outsource Sales and Use Tax Reporting?

This process can be complex; there are currently more than 9,000 state and local tax jurisdictions. On top of that, your company must keep track of developing nexus laws and requirements. This can lead to resource constraints and increased compliance risk.

Accurate Liability Calculation

The biggest risk is under- or over-collecting sales and use tax without having a complete understanding of your nexus footprint and the applicability of tax to your revenue streams.

Missed Deadlines

Most returns are due on the 20th of the month. However, filing deadlines can occur on a quarterly, annual, or semiannual basis depending on your company’s liability amounts and the state or local jurisdiction’s requirements.

If your company operates in several jurisdictions, determining when to file each form can be challenging. This can lead to missed deadlines and associated penalties.

Penalties and Interest

Penalties for filing incorrectly or missing deadlines can be up to 25% of an associated liability. Interest can be up to 15% on top of that. This means your company could end up paying up to 40% of your total tax burden in reporting penalties and interest.

Filing Errors

With the sheer volume of state and local jurisdictions-related forms many companies must complete, not knowing where, how, and when to file can be a significant hurdle.

Filing dates, deadlines, data requirements, and approaches vary from jurisdiction to jurisdiction, which can lead to filing errors.

Overpayments

If your company overpays sales or use tax, it can be difficult to get these funds back. This manual process can take up to three-to-four months and require more of your company’s time and resources, while draining cash flow in the interim.

Challenge 1: Understanding Nexus

Nexus refers to if a company has a filing obligation in a jurisdiction based on its presence there. Nexus requirements have assumed additional complexity following the US Supreme Court’s South Dakota v. Wayfair, Inc. (Wayfair) ruling, which introduced new implications for transactions across state lines.

Now, your company can establish nexus much more easily, meaning you’ll likely need to remit sales and use tax in more locations.

Key ways a company can establish nexus include:

• Physical presence
• Economic presence
• Marketplace facilitator nexus
• Presence though affiliates
• Other nexus rules, such as cookie nexus or click-through nexus

Each of these sales and use tax nexus rules can be complex and vary by jurisdictions, and this may impact your filing obligations. As a result, it’s important to understand not only if, but how, your company has nexus in a given location.

Additionally, nexus affects US-based taxpayers as well as foreign-based taxpayers.

Challenge 2: Manual Sales and Use Tax Determination or Collection and Reconciliation Process

Manual sales tax determination or collection processes can be complex, time consuming, and introduce errors that increase compliance risk. This is especially true for industries such as technology, food products, and health care, which have additional regulatory requirements.

Using the tax determination process on purchases for companies in healthcare, manufacturing, and oil and gas industries is also significantly laborious and complicated. It generally requires purchase invoice review to understand the nature and usage of the products or services being purchased to apply the appropriate use tax rules in a specific jurisdiction.

As previously noted, there are more than 9,000 taxing jurisdictions, all of which have different tax rates. When you add the complexity of local tax-filing requirements to this process, manual calculation can become a daunting task.

Reconciling sales tax collection amounts every month between your sales tax system and general ledger systems introduces more complexity. Your tax team should track sales tax data collected from each jurisdiction where your company has nexus and properly reconcile it in both systems. When completed incorrectly, this process can result in filing issues and missed deadlines.

Challenge 3: Navigating Resource Constraints

Many companies don’t have a dedicated sales and use tax team. This means employees must redirect time and energy into measuring and remitting sales and use tax, in addition to the jobs they were hired for. This process can take up to two weeks each month, which can create backlogs for other sales and use tax-related projects.

In addition, companies can experience setbacks if employees who are typically in charge of these tasks leave or retire without adequate transition planning.

Insourcing

For many companies, insourcing can be the default option for tackling sales tax compliance obligations. However, insourcing can have many drawbacks, including:

• A relatively higher cost than an outsourcing solution
• Limited performance capacity, which can lead to the compliance process taking significantly longer
• Lack of in-depth knowledge of sales and use tax legislative updates
• Risk of overdependency on a dedicated resource

Outsourcing

Outsourcing dedicated sales and use tax compliance professionals can provide your company with the experience and resources it needs to complete this process efficiently. These resources may include:

• Insight into tax requirements and compliance updates. As requirements continue to change, outsourcing tax services to a qualified service provider means your company won’t need to worry about potential late filings, transition issues, penalties, and overpayments.
• Insight into best practices.  A qualified service provider working with a variety of companies may have the ability to bring in new ideas which may be observed through work with other clients and could help optimize processes.
• Enhanced software capabilities. With access to automated processes and tools, including cloud reporting solutions, data analysis, and automated technology, qualified sales and use tax compliance professionals are well positioned to serve your sales and use tax needs from start to finish. What’s more, an outsourced compliance tax team may access data sources your business already uses to provide compliance support and continuity.
• Full coverage. Whether you outsource your sales and use tax compliance completely or use external professionals to complement your in-house resources, the outsourced compliance team may enhance your ability to efficiently accomplish all your sales and use tax compliance-related objectives. 
• Use tax review. You may save time and resources by outsourcing the use tax determination process. A qualified service provider should have the industry-specific technical knowledge to accurately and efficiently review your purchase invoices and reduce additional costs associated with employing a dedicated resource, licensing tax determination software, or audit exposure related to non-compliance. External professionals may also help refine and improve your use tax determination process.

We’re Here to Help

The effort involved in sales and use tax compliance can vary based on your company’s size and complexity. If you have any questions about steps to bolster your approach, please visit our services page and contact your Moss Adams professional.