Managing sales tax is a critical aspect of running any business. With ever-changing laws and regulations, the risks associated with sales tax can quickly escalate if not properly addressed. From compliance to protecting your bottom line, understanding and mitigating sales tax risks is essential.
The first step in this process is asking the right questions, questions that can help identify hidden risks, prevent costly mistakes, and ensure your business remains in good standing. In this article, we’ll explore the key questions every business should ask to assess their sales tax situation and explain how they can uncover potential issues before they become significant problems.
Why Sales Tax Risks Are Crucial for Businesses:
Sales tax is more than just an administrative task, it’s a legal responsibility that can significantly impact your business. Failing to manage your sales tax obligations properly can result in penalties, audits, and financial losses. As the rules surrounding sales tax continue to evolve, businesses must stay ahead of these changes to avoid falling out of compliance.
For consultants helping clients or businesses looking to ensure their operations are smooth and compliant, understanding sales tax risks is paramount. By asking the right questions, businesses can uncover hidden risks, address compliance gaps, and develop strategies to prevent future tax issues.
Key Questions to Uncover Sales Tax Exposure:
To effectively assess your sales tax situation and mitigate risks, it’s crucial to ask the right questions.
Let’s explore some of the most important ones that every business should consider.
Has Your E-Commerce Business Grown in 2024?
The rise of e-commerce has significantly changed how sales tax is applied, and this shift requires businesses to be vigilant. In 2018, the Supreme Court’s South Dakota v. Wayfair ruling expanded the concept of “economic nexus,” which allows states to require out-of-state sellers to collect sales tax if they meet certain sales thresholds. Many states now require businesses to collect tax when their sales exceed $100,000 in a year.
If your e-commerce sales have grown in 2024, it’s vital to reassess your sales tax obligations. For example, a business that has grown its online sales could now be required to collect sales tax in several states, even if it doesn’t have a physical presence there. Failing to recognize this could result in hefty penalties and back taxes.
Have You Hired Remote Employees?
With the increasing trend of remote work, businesses are facing new challenges in understanding where they have sales tax obligations. Hiring employees in different states can create “physical nexus,” which triggers the requirement to collect and remit sales tax in those states, even if the company doesn’t have an office or warehouse there.
Are You Confident in Your Sales Tax Nexus Assessment?
Nexus, the legal connection between a business and a state, is the foundation for determining whether you need to collect sales tax. States have different rules for how nexus is established, but it typically involves a physical presence (such as an office or warehouse) or economic presence (based on sales volume or transactions).
It’s important to regularly review your nexus footprint, especially as your business expands into new states or markets.
Have You Conducted a Taxability Review of Your Products or Services?
Sales tax laws differ significantly from state to state, and so does the taxability of products and services. Generally, tangible personal property is subject to sales tax, while services often are not. However, the taxability of goods and services can vary widely depending on the state, the product, and even specific circumstances like sales tax holidays.
Businesses need to regularly assess the taxability of their offerings to avoid errors in tax collection. For example, a Software as a Service (SaaS) company may face different sales tax requirements in each state. In some states, SaaS products are taxable, while in others, they may not be. A taxability review helps businesses ensure they’re collecting the correct amount of sales tax.
Are There Any Pending Sales and Use Tax Audits or Liabilities?
Sales and use tax audits are common, and failing to address potential issues before an audit can lead to costly consequences. If your business is under audit or anticipates one in the near future, it’s essential to conduct an internal review of your sales tax filings. Addressing any discrepancies proactively can save you time, money, and potential fines.
Are You Considering Selling Your Business or Seeking Investment?
If your company is preparing for an M&A or seeking venture capital, sales tax becomes a focal point during due diligence. Buyers and investors will closely examine the company’s sales tax practices, looking for any potential liabilities. Even a minor sales tax issue can complicate or even derail a deal.
For example, if a business is being sold and due diligence uncovers a significant sales tax exposure, an unpaid tax bill or an unresolved audit, the deal could be delayed or canceled. Being proactive about addressing these issues and mitigating risks before an M&A can ensure a smoother transaction.
Managing sales tax risk is crucial for the long-term success of any business. By asking the right questions, regularly reviewing your sales tax situation, staying updated on changes in laws, and seeking professional help when needed, you can protect your business from costly penalties and audits. While sales tax compliance can be complex, a proactive approach allows businesses to navigate it successfully. Addressing issues early, such as nexus, taxability, or international expansion, helps maintain compliance and avoid unexpected liabilities. Ultimately, asking the right questions today ensures financial peace of mind for tomorrow.
