First of all, I should define what I mean by "trouble."
1. Big assessments and big fines
2. Embarrassing assessments that, while not crippling the company, will nevertheless do bad things for your career
3. Large-scale overpayment of taxes. See item 2 regarding career impact.
1. Making sales that are taxable and you didn't know it. Do you perform taxable services? What about non line-of-business sales? Do you, for example, sell a lot of used equipment? Do you maintain a company cafeteria? You're probably selling more than just what's on the top line of your income statement. And don't even get me started about the other states you sell to. See below.
2. Related to 1 - making taxable sales in states where you have should have been collecting tax and didn’t realize it. In other words, you have nexus in a state but you don't know it. And you don't even know what are taxable sales in that state. It's a very common problem, and the states would really like to catch you.
3. In another instance of making sales you didn't know were taxable, beware of making intercorporate sales. Depending on your company, your business model, how you handle your paperwork, and the volume of the transfers, this may or may not be a problem. But you need to make sure. Of all of the assessments I've heard of, the biggest were in this category. And the only possible alternative for one taxpayer was bankruptcy.
4. Not collecting exemption certificates on your sales. This will mean more work for you when the audit hits, as well as embarrassment with the auditor, your management, and your customers. And you'll pay some taxes, interest and penalties.
5. If you buy a business, make sure you don't inherit the seller's sales tax liability. If you buy as a bulk sale, you will, unless you do it right.
6. Not accruing taxes on your taxable purchases where no taxes were collected by the seller. AP generally knows this one, but may not have good systems in place to be sure of catching all of these invoices.
7. Overpaying taxes on invoices that you thought were taxable, but weren't. More tips are in our Best Practices file.
8. Who is the person in your organization who is most knowledgeable about sales and use taxes? It's usually the controller, but it's often the AP staff. But note how many of the above problems are related to the sales and marketing departments. And how many of your sales and marketing people have any knowledge or understanding of sales and use taxes? Right. That's what I thought. Here's one example of what they can learn.
9. Relying on bad resources for answers. Calling the state is a no-no. So is believing the auditor without getting something in writing. Here are good sources of information.
10. Finally, collecting sales tax, but failing it remit it to the appropriate state. Frankly, if you’re doing this, you shouldn't bother reading this blog anymore. What’s the point? Get measured for an orange jump suit instead.
Here's a link to some horror stories that will make excellent bedtime reading.
The Sales Tax Guy
See the disclaimer - this is for education only. Research these issues thoroughly before making decisions. Remember: there are details we haven't discussed, and every state is different. Here's more information
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