Finance and accounting technology became the No. 1 software budgeting priority for small and mid-sized businesses (SMBs), according to a survey conducted last year by Capterra. Almost 54 percent of respondents were budgeting to invest in accounting tools in the next 12 to 24 months, with those in the retail industry specifically forecasting to spend between US$30,000 and $40,000. Given the ultra-competitive market in which SMBs operate, and the remarkably intricate compliance landscape they have to navigate, these findings are not surprising.
Transaction tax is a perfect example illustrating one such accounting burden retailers face. Those selling across state lines need to keep up with changing sales and use tax rules in over 11,000 U.S. jurisdictions. In addition, there have been 5,886 standard new and changed sales tax rates in the last decade. With the combination of jurisdictions, as well as changing standard and non-standard rates, manually keeping up with these shifting regulations and requirements could be onerous for SMBs.
Keeping Track of Rules
On top of the overwhelming number of different rates and jurisdictions, sellers need to keep track of a host of exemptions and applicable rules. For example, most states exempt purchases of prosthetic devices, but require a buyer to provide an exemption certificate when purchasing them.
On the other hand, 38 states and the District of Columbia offer full or partial sales tax exemptions for groceries. A buyer is not required to present an exemption certificate, but which items are classified as groceries differ by state — further entangling compliance for retailers.
Variability in product taxability is also a headache to manage as rules vary across states, based on product type, date sold, ingredients, how the product will be used, or if there is an applicable sales tax holiday. An apparel item identified as a luxury item is taxed differently than one categorized as essential. Similarly, different taxability rules apply to food and beverages when sold in an eating establishment than when the same items are sold in a grocery store.
The Supreme Court’s Wayfair ruling last year allowing states to collect tax from remote sellers further knotted the complexity of transaction tax. Businesses now must pay close attention to where they are doing business, keep track of sales in each location to know when they might pass defined thresholds that trigger sales tax collection requirements, register in those jurisdictions, collect the right amount of tax, and remit returns in the right locations.
Adding to this complexity, SMBs that don’t meet the post-Wayfair thresholds for collecting and remitting sales tax still may need to comply with “notice and report” laws. The laws, which vary by state, require businesses either to collect and remit themselves or notify consumers that they may owe state use tax.
For example, businesses that reach $10,000 in sales in Pennsylvania must comply with the “notice and report” law; however, this is only the case until they reach the $100,000 threshold, triggering the obligation to collect, remit and report. In this case, retailers still need to track transactions and sales thresholds for meeting these requirements.
Getting Transaction Taxes Right
The intricacy of sales and use tax management can quickly multiply for SMBs looking to expand their product offerings or enter new markets. They need to determine if they have a requirement to collect tax at both the state and local levels in every new location, determine accurate rates, and monitor for changes, which happen often. This makes transaction tax management a particularly acute problem for growing SMBs.
Online, omnichannel and traditional brick-and-mortar retailers, as well as distributors and wholesalers, are burdened with the intricacies of tax compliance. Businesses that face the most hefty tax management burden include not only merchants selling different types of products across multiple states, but also retailers that have storefronts in one state (even in one single tax jurisdiction) yet rely on warehouses and distribution centers located in multiple states. This too can create nexus that drives the remote seller sales tax obligation.
Why is it important for retailers to get the sales tax right? The Department of Revenue will question why a retailer didn’t charge accurate sales tax. At the same time, wrong sales tax on a receipt can impact customer satisfaction, trust and loyalty, which are key to an SMB’s success. However, compliance doesn’t end with accurate sales tax calculations. Retailers also need to know which one of the hundreds of forms to fill out and in which jurisdictions they need to submit returns to reduce the risk of costly penalties and interest.
Second only to property taxes and accounting for 23.5 percent of total tax collections, sales tax is one of the largest sources of state and local tax revenues, according to the Tax Foundation. As states more actively pursue sales tax collection, audit risk intensifies.
For SMBs operating on thin profit margins, the cost of noncompliance is significant and can have a severe impact on cash flow. Large enterprises may be able to manage these burdens and leverage their tax departments for audit defense. If an SMB owner doesn’t rely on an automated solution that provides easy access to historical returns, ledgers and other important documents with a clear audit trail, the scenario is different. Their attention, valuable time and resources will have to shift away from running and growing the business to managing the grueling audit process.
Benefits of Automation
SMB owners wear many hats. Besides running day-to-day operations, they need to keep pace with competition, ensure quality of services and customer satisfaction, and attract and retain talent, among many other responsibilities. In addition, their ability to handle numbers is critical to maintaining operational effectiveness, customer experience and profitability. However, they don’t have the resources and manpower of a tax department supporting a large enterprise.
To gain greater control of compliance, SMBs need to automate tax processes. As the convenience of online shopping escalates customer expectations, advanced point-of-sale, enterprise resource planning and e-commerce platforms can help retailers operate with efficiency and ensure uninterrupted storefront availability, as well as fast, secure and accurate transaction processing.
A tax engine is a critical element of the IT infrastructure businesses rely on, as it guarantees accounting accuracy and a seamless shopping experience for customers. Without the support of an IT department, SMBs should seek out tax solutions that easily can be implemented and integrated with existing systems.
With the proliferation of e-commerce, SMB retailers can more easily reach new consumers and expand their product offerings. Such growth comes with significant sales and use tax implications that they need to be prepared to handle. Businesses should start with establishing a baseline of their current tax responsibility, but also keep in mind that it can change completely with even a minor shift, such as a new product category.
SMBs can cut through the complexity of managing transaction tax with an automated solution. A company spending more time researching rates and state-by-state tax nuances or lacking complete compliance confidence should consider tax software not only to simplify calculations and reporting, but also to gain a clear understanding of the tax consequences of every business decision and the ability to improve planning for future growth.