Tax Issues and Improving Bottom Lines
Five retail tips show your how to tackle them.
February 25, 2010
With an April 15 tax deadline looming, now is the time for businesses to address their tax responsibilities. Here are five tips to help make this a painless — and possibly profitable — experience.
1. Be aware of jurisdictional tax changes. Applying tax accurately can be complicated for retailers. Depending upon store locations and registrations, as well as product or services types and usage, retailers often need to keep abreast of hundreds of tax changes per year. In 2009 alone, there were 850 state, city, county and district tax changes throughout the U.S. When you factor in exception rules such as “tax holidays,” in which items such as apparel and school supplies are exempt from sales tax, the scenario facing retailers gets further complex.
Traditionally, retailers manually entered tax changes into their systems — a time-consuming process fraught with potential errors. If a retailer is undercharging tax, for example, it must make up the difference, which can prove costly. Additionally, such mistakes can lead to even stickier, longer-term problems such as class-action lawsuits, which have damaging effects on a corporate brand’s image. Retailers are increasingly turning to automated systems that accurately update their systems and eliminate potentially costly errors.
2. Know how to properly tax merchandise returns. Tax gets complicated when customers return items purchased from another state or items purchased online in a retail store. Retailers need to ensure they accurately tax these returns based on the appropriate jurisdictional rate that was applied at the point of purchase.
3. Understand that tax rules apply for all your selling channels. Today’s retailers operate in multichannel sales environments — brick-and-mortar, online, catalog/call center and wholesale. Each channel has its own set of complex tax implications. While federal law exempts Internet sales from tax, online retailers must collect tax if they have a physical presence in the state where the item is shipped. Interpretation of this law created controversy when Amazon sued the state of New York after being required to collect sales tax because it had affiliates located in the state.
4. Manage tax to reduce cash reserves. Retailers can reduce the money they need for underpayment through accurate (i.e., automated) tax collection at the point of sale. With an automated tax technology solution, the need for cash reserves to cover audit risk and exposure is greatly reduced. The capital typically earmarked for the reserve then can be put to work for the business.
5. Lower your audit risk. Sales tax errors open the door to potential tax compliance issues, resulting in an array of out-of-pocket expenses. Audit preparation can be extremely resource-intensive, and assessments including interest and penalties can be costly. Accurate sales tax calculation and documentation can greatly reduce the pre-audit information gathering process and, in turn, reduce the odds of an assessment.
While there’s no way to reduce the frequency and volume of tax changes, retailers can increase compliance and, in turn, reduce any tax-related negative impact on their bottom lines by implementing an automated tax technology system.
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John Cowan is director, Oracle and Retail Solutions at Vertex Inc.,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 was previously published in All About ROI.