sales tax compliance risk
Small Business Tax Policy

Understanding Sales Tax Compliance Risk in a Post Pandemic Environment

As a result of the pandemic, many companies have had to reimagine their businesses.

2020 was a year of unprecedented change across every facet of our lives. It seems it will continue for much of 2021 and beyond. As thousands of business leaders struggle to navigate these times of great uncertainty, finance leaders are tasked with supporting rapidly changing business strategies. Doing so while minimizing corporate risks, such as sales tax compliance risk, all with fewer resources. 

COVID’s Effect on Business Operations

As a result of the pandemic, many companies have had to reimagine their businesses. For some, like e-commerce businesses and those who converted their manufacturing operations to produce health products like masks, PPE or ventilators, the opportunity has been huge. For others, such as brick and mortar retailers and restaurants, they have had to shift their businesses to support online ordering and purchasing almost overnight. 

These seismic shifts in business strategy have introduced more sales tax compliance risks and created more complexities for finance teams who are being forced to navigate these changes on-the-fly. 

To better understand the growing concerns finance leaders are facing and how they are attempting to handle the massive changes, TaxConnex commissioned Porter Research in November 2020 to study 100 financial leaders and their concerns leading into 2021 related to multi-state sales tax obligations.

Sales tax may not be top of mind when reviewing the top risks for your business, but it can have a huge impact on the business (and business leaders) if not done correctly, or ignored entirely. 

Sales Tax Obligations

One of the most misunderstood tax obligations is arguably sales tax. Because sales tax is considered a pass-through tax, it is often overlooked. However, with tax rates approaching 10% and potential penalties and interest under audit, a business could be exposed by 20% or more of their total revenue. It is not something to be left at the bottom of the to-do list. 

According to the survey results, finance leaders have big concerns when it comes to managing sales tax, and for the majority, (71%), the way they are managing sales tax is not completely working for them. The range of business types and sizes varied within the survey, but across the board there was dissatisfaction and worry around how to understand changing nexus laws and taxability. 

Sales Tax Nexus

Nexus is the connection a business has with a state or taxing jurisdiction. If there is no connection between the jurisdiction and the company, the business is not required to adhere to the jurisdiction’s sales tax rules. But, nexus is not stagnant for most businesses. Staying on top of rapidly changing company strategies and ever-changing state and local sales tax regulations is a significant challenge for all finance leaders.

Since the 2018 Wayfair decision, 43 of the 45 states (plus DC) that impose sales tax have enacted economic nexus laws, and multiple jurisdictions within states that don’t have sales tax have enacted their own economic nexus standards on a jurisdictional level. It’s a lot to keep up with. When you see that the vast majority of respondents reported that they are dependent on internal resources to manage the bulk of their sales tax functions.  (Almost half [46%] of respondents still manage nexus – their sales tax footprint in a tax jurisdiction – in-house and 47% prepare and file sales tax returns in-house.)  It’s easy to see why so many are not satisfied. There’s just too much to manage internally without the right tools or expertise. 

With nearly 50 million Americans losing their jobs last year and 11 million still unemployed nearly 13 months after the pandemic began, the reality of being forced to do more with less is being felt in every corner of almost every company, including the finance department. 

Understanding Sales Tax Compliance Risk – Summary

As teams face hiring freezes and budgetary limitations, the use of internal resources in 2021 must be re-evaluated. How are teams (that may be smaller, or more burdened than previous years) supposed to keep up with the mounting pressure and changes surrounding sales tax without more resources or help?

By seeking outside help to alleviate the burden and gain more knowledge on the topic, finance leaders are better able to provide for their teams, support their company growth goals and reduce the risk and burden associated with sales tax.

For more articles like this, be sure to check out this section of this blog.

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