Introduction

One of the most pressing challenges for US retailers is complying with the sales and use tax laws of 13,000+ taxing authorities.

The process of calculating, collecting, remitting, and filing the sales tax, an indirect tax borne by the customer, is highly complicated and costly, but it is vital for a company to access new markets and avoid fines from the state and local governments.

Companies have to go through the intense process of calculating the sales tax rates for each product sold or service delivered across all the jurisdictions of operation, manage exemption certificates, and be equipped to deal with audits, leading to a desperate need for systems that can automate the process.

To figure out how you can comply with the sales tax requirements in this challenging regulatory landscape, you need to gain:

• An overview of the current sales tax landscape.
• The sales tax cycle.
• The challenges of manually handling sales tax obligations.
• How investing in automation can make you more efficient and sales tax compliant.

Sales Tax in the USA

Companies are required to pay a Sales Tax by their state and local governments on goods and services sold within the jurisdiction at the time of the sale of the product or performing of the service. There is also a Use Tax that comes into the picture when the product is used, stored, or consumed in the jurisdiction.

Every state except New Hampshire, Oregon, Montana, Alaska, and Delaware (the NOMAD states) has state-level taxes. However, it is worth noting that states like Alaska allow taxation on sales at the county, district, city, or transit level.

While calculating the sales tax they owe, retailers need to consider the amount subject to tax, along with deductions, such as retailer’s coupons, shipping charges, and manufacturer’s coupons.

Notably, the retailers need to collect tax as long as they are at a Nexus, a physical location in the jurisdiction. What constitutes a nexus may vary from state to state, but usually, it means the company has:

• A store in the jurisdiction.
• Taken part in a trade show.
• Has a sales presence.
• The presence of remote employees.
• Providing services in the area
• Making deliveries in the jurisdiction using company-owned vehicles.
• Has affiliates operating on their behalf in the jurisdiction.

The Sales Tax Cycle Explained

Essentially, a company has to undertake five steps to be fully compliant with its sales tax obligations as a retailer.

1. Understand where the company has to collect and remit sales tax.

   It is mission-critical to evaluate all your business practices and understand where you may have nexus obligations. These regulations keep changing frequently, so you need to keep yourself updated on where you are liable to collect and pay sales tax.

2. Register for sales tax collection and remittance.

   Businesses can’t collect sales tax unless they are registered in the appropriate jurisdictions as per the state or local law. The process can be challenging, as each location will have its registrations, forms, and licenses.

3. Figure out the right sales tax amount.

   In the US, there are about 13,000 tax jurisdictions, each with its unique rates and rules for product taxation. Companies are required to navigate the vast landscape of sales tax requirements and calculate the right amount so they don’t run into unhappy auditors or customers due to under or over-collecting sales taxes.

4. Be aware of sales tax exemptions

   Nonprofits and government agencies aren’t required to pay sales tax in some states. Also, items intended for resale may not attract a sales tax in some cases. Companies need to have a system in place to collect valid exemption certificates to avoid penalties during audits.

5. Remit the collected sales tax to the authorities.

   Each of the local tax authorities will have their unique requirements for remitting taxes. For instance, they will require you to either remit tax via paper returns or through electronic means. Even the due date and the frequency of remitting the sales tax to the local authorities are bound to change based on jurisdiction, so the companies need to come up with the necessary resources to stay compliant.

Current Challenges in Managing Sales Tax Obligations

The number of jurisdictions, laws, nexus obligations, and varying remittance requirements may present a massive challenge for companies that are calculating, tracking, and remitting their sales taxes manually.

Even a large organization with plenty of accountants working with an Excel sheet may find that there are a lot of errors, burnout in the team, and constant audits, leading to fines for non-compliance.

Typically, these challenges arise from the inevitable shortcomings of manually handling the state and local tax, including:

• The inability to cope with demand for tracking and complying with sales and use tax across channels, such as brick-and-mortar locations, catalogue, e-commerce, resale, wholesale, etc.
• Complexity in keeping track of the varying regulations surrounding matters, like tax exemption certificates across jurisdictions.
• Penalties from the tax collectors when retailers make errors in calculating the sales tax, leading to the need for huge cash reserves.
• Challenges in keeping track of employee/ product presence across jurisdictions to correctly figure out the nexus obligations for sales tax.
• Inability to properly characterize what is sold, especially when it comes to services.
• Difficulties identifying where a sale should be sourced and applying the appropriate sales tax rate.
• Impracticalities when it comes to tracking sales holidays for items, such as school accessories during “back to school” season and sales tax caps for items like clothing, where anything with a sales price of under US $250 is exempt.
• Staying on top of the volume of returns for all the relevant jurisdictions every month./li>

Sales Tax Miscalculation’s Impact on Your Customers and Brand Reputation

Without a proper system in place to handle the calculation and remittance of your sales tax in all jurisdictions, it is impossible to avoid taking a hit when it comes to customer experience. Customers will especially leave with a poor impression of your brand if you end up calculating the wrong sales tax or charging them for exempt products or services.

In Conclusion

Navigating the intricate world of US sales tax compliance is a significant challenge for retailers. To stay on the right side of the law and maintain a positive brand image, it's crucial to automate sales tax management. Manual processes can lead to errors, penalties, and unhappy customers.

In Part 2, we'll explore solutions to streamline this process and ensure accuracy and compliance. Stay tuned for more.