By Diane Yetter, President and Founder of Sales Tax Institute
When it comes to building a strategy to manage sales tax, every company will have its own set of obligations, complications and concerns. What is consistent among nimble sales tax strategies (those that improve efficiency and adaptability while reducing risk) are the components you need to think about. Each company must address critical sales tax issues specific to its business operations and industry like nexus and taxability, build a cross-functional team with internal and external partners and ultimately create a strategy that adapts to changes in the business and in the law.
A reactive approach to managing sales tax will stress you out unnecessarily. You need a strategy that helps you be proactive in the face of the ever-changing sales tax landscape and supports the overall success of the business.
Understanding the sales tax challenge
Changes to sales tax rules and requirements can occur with little or no notice. You need to know how sales tax laws apply to your company’s operations so you can stay compliant and be well-positioned to react to changes.
Knowing where you have nexus in the post-Wayfair environment, determining the taxability of your products and services in the jurisdictions where you have nexus, setting up processes to manage regular tax filing and understanding audit triggers and best practices are the foundation of your sales tax strategy.
Assembling the sales tax dream team
You need to have the right team made of up of the right players to align your sales tax strategy across your entire business. It is up to company sales tax specialists to build sales tax awareness cross-functionally throughout the company as leadership simply may not understand sales tax nuances and the risks of noncompliance to make this happen.
What departments should you look to gather your allies in sales tax? The information technology, legal, sales, marketing, billing and accounts receivable departments are perfect places to start as they are all impacted by sales tax in some way. You need to have contacts in those departments to fine-tune things like contract and invoice language, approaches to customer relations and marketing language that can impact your sales tax obligations.
Your IT department will play an integral role in your sales tax strategy. IT has the expertise in company systems and capabilities that you need to integrate efficient sales tax software solutions, like Sovos, into your billing or procurement systems.
For many companies, a nimble strategy also requires trusted external partners. Your company may not have the internal capacity required to manage every single component of sales tax compliance. A trusted sales tax advisor and/or technology provider can step in and support some of the activities.
Thoroughly vet any external sales tax advisor you want to join your team. They should have true sales tax expertise (not just a sideline to income tax), be able to shepherd you through challenges and bring potential roadblocks and issues to your attention before they happen. Your chosen technology provider should allow for seamless integration with your existing technology and meet your specific business needs based on your industry, your sales footprint, the complexity of your tax determination and your desire to outsource or keep in-house certain sales tax processes.
Building and supporting an adaptable strategy
Once you have a handle on your sales tax requirements and have a team in place, you can flesh out your nimble strategy to be responsive to changes, whether they are opportunities for growth within your business or are required by the tax authorities.
Business growth means that your nexus footprint will never be static. You should conduct periodic nexus reviews, whether internally or with a trusted external advisor, as part of your nimble strategy. Growth through activities like geographic expansion, increased sales volume, selling on new channels and mergers and acquisitions will all impact where you have nexus. You must also be aware of the locations of people and property that support these activities, including remote employees, traveling employees, inventory and new physical facilities for nexus purposes.
Cross-department communication needs to be strong so that the sales tax department is aware of new initiatives and can swiftly adjust for sales tax. There is often little to no time between when a company creates nexus and when compliance obligations begin. The sales tax team must complete taxability research for new products or services, review marketing, invoice and contract language that surrounds anything new, as well as perform accurate setup in company software systems.
Foundational processes built into your sales tax strategy should also be evaluated and updated periodically in light of new activities. For example, if your company expands into a new state, how does that affect your tax filing requirements? If a new product will be sold predominately for resale, how will that impact your exemption certificate management processes?
Sales tax: a key component of company success
The sheer ability of your business to succeed and grow is more contingent on sales tax than you may think. The average sales tax rate is around 9%—meaning if you ignore your company’s sales tax obligations, you are potentially at risk of losing 9% of your gross revenue on any sales you didn’t collect tax on as required. That is certainly nothing to sneeze at!
A thoughtfully implemented and nimble sales tax strategy protects your company from financial and audit risk, preserves your company’s strong reputation in the market and ensures company longevity. Time invested in understanding your company’s sales tax requirements, building a savvy team of internal and external partners and shaping processes and systems that respond to change is incredibly well spent.
While complicated and ever-changing, sales tax should never be a barrier to your business growth. The Sales Tax Institute offers a variety of expert-led courses for all experience levels and hundreds of free online resources to help you get the sales tax knowledge you need to develop an effective strategy. Sovos can help you take the complexity out of complying with your obligations and be your technology partner as your business evolves.
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Diane L. Yetter is the “Sales Tax Nerd®” as well as a strategist, advisor, speaker, and author in the field of sales and use tax. She is president of YETTER Tax, a sales tax consulting and tax technology firm. She is also the founder of The Sales Tax Institute, which offers live and online courses to educate business professionals about sales and use tax.
