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John Cowan

State and Local Tax Compliance

Five tips show you how to minimize exposure and maximize revenue.

June 26, 2008
by John Cowan

Are you confident your organization is on top of state and local tax requirements? Are you concerned about the tax administration and management practices of a company that you have just acquired or merged?

State and local tax legislature changes frequently and the revenues from the tax dollars, and the heavy penalties levied for non-compliance, fund important things such as our transportation infrastructure, education, healthcare and a host of social services.

As a retailer, your focus is on accurately calculating and collecting taxes and avoiding audits. Many people think the taxation process is little more than multiplying a rate by an amount. The reality is that calculating tax is a complex business process.

Here are five examples of ways you can ensure your state and local tax processes are compliant:

  1. Has someone reviewed your business practices and legal entity structure for tax nexus?

    Before tax can be collected there needs to be a business activity that creates nexus, or a requirement for you to collect and remit sales tax, between your corporation and tax authorities. These rules vary state by state and can include criteria such as having your own delivery fleet to provide goods in a particular jurisdiction.

  2. Have you registered as a taxpayer in the state and local jurisdictions where you need to?

    State and local tax rates must be considered to determine the combined sales tax rate of any given address or physical location. The potential combinations of these combined tax rates exceed 7,000 in the U.S.

  3. Does your company assign staff to the task of tracking rate and tax rule changes so that you are in compliance and not exposed to audit penalties and interest?

    States generally have a combination of rates (state, county, city, district and other local municipalities) and annually there are more than 700 tax-rate changes that occur across the country.

  4. If you have significant sales tax collection and remittance amounts, do you reserve a reasonable amount of cash to allow for expenses to cover process errors that may lead to penalties?

    Each state has a host of legislation that defines the different taxability of things, typically known as tangible personal property, or services sold within a given jurisdiction. When computing tax manually, the range of variation in the rules makes errors more likely.

  5. Has your organization investigated tax automation solutions that can help minimize your exposure and expense, and focus your staff on more strategic initiatives?

    Rates aside, states and sometimes localities, publish special calculation algorithms that cap, or set minimum/maximum thresholds, or exempt tax on specific holidays or for specific segments of the population. The intricacies of the rules become overwhelming to implement on a manual basis.

As a catalog retailer, you most likely provide goods and services through a variety of channels: business-to-business transactions, e-commerce transactions and mail-order sales. Each of these business channels should be evaluated by an expert to determine the steps the organization should take to effectively and fairly calculate and remit sales tax. Depending on your legal entity structure and your business practices, you may need to make an investment in automated tools to ensure compliance and to not over-budget the funds needed to be set aside for tax payments and potential penalties.

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John Cowan is Director, Oracle and Retail Solution Practices team that focuses on building and delivering a comprehensive, yet practical solution for multi-channel retailers to stay in-step with proper sales tax compliance and legislation for Vertex, Inc. Vertex is the leading provider of advanced tax technology solutions, delivering products and process management services to customers worldwide. Cowan has spent 15 years in the tax automation industry working in various roles at Vertex Inc. He directed Vertex's early efforts with ERP and POS partners to integrate Vertex tax systems for the benefit of our mutual clients.

* This article first appeared in Catalog Success Tips and Tactics Newsletter.