If your company operates in several jurisdictions, determining when to file each form can be challenging. This can lead to missed deadlines and associated penalties.
Penalties and Interest
Penalties for filing incorrectly or missing deadlines can be up to 25% of an associated liability. Interest can be up to 15% on top of that. This means your company could end up paying up to 40% of your total tax burden in reporting penalties and interest.
With the sheer volume of state and local jurisdictions-related forms many companies must complete, not knowing where, how, and when to file can be a significant hurdle.
Filing dates, deadlines, data requirements, and approaches vary from jurisdiction to jurisdiction, which can lead to filing errors.
If your company overpays sales or use tax, it can be difficult to get these funds back. This manual process can take up to three-to-four months and require more of your company’s time and resources, while draining cash flow in the interim.
Why Is Accurate Sales and Use Tax Compliance Such a Challenge?
There are three main reasons why sales and use tax compliance is particularly challenging for many companies:
- Nexus complications
- Manual sales tax collection processes
- Resource constraints and data reconciliation
Challenge 1: Understanding Nexus
Nexus refers to if a company has a filing obligation in a jurisdiction based on its presence there. Nexus requirements have assumed additional complexity following the US Supreme Court’s South Dakota v. Wayfair, Inc. (Wayfair) ruling, which introduced new implications for transactions across state lines.
Now, your company can establish nexus much more easily, meaning you’ll likely need to remit sales and use tax in more locations.
Key ways a company can establish nexus include:
- Physical presence
- Economic presence
- Marketplace facilitator nexus
- Presence though affiliates
- Other nexus rules, such as cookie nexus or click-through nexus
Each of these sales and use tax nexus rules can be complex and vary by jurisdictions, and this may impact your filing obligations. As a result, it’s important to understand not only if, but how, your company has nexus in a given location.
Additionally, nexus affects US-based taxpayers as well as foreign-based taxpayers.
Challenge 2: Manual Sales and Use Tax Determination or Collection and Reconciliation Process
Manual sales tax determination or collection processes can be complex, time consuming, and introduce errors that increase compliance risk. This is especially true for industries such as technology, food products, and health care, which have additional regulatory requirements.
Using the tax determination process on purchases for companies in healthcare, manufacturing, and oil and gas industries is also significantly laborious and complicated. It generally requires purchase invoice review to understand the nature and usage of the products or services being purchased to apply the appropriate use tax rules in a specific jurisdiction.
As previously noted, there are more than 9,000 taxing jurisdictions, all of which have different tax rates. When you add the complexity of local tax-filing requirements to this process, manual calculation can become a daunting task.