S P O N S O R E D
The devastating health risks associated with COVID-19 have certainly made headlines over the past year. Another potential fallout of the pandemic for your firm’s clients? Costly sales and use tax audits.
There are two factors driving this trend: a) many state and local budgets have taken a hit during the past year due to the pandemic; and b) on average, 40 percent of a state’s revenue is derived from sales tax. It’s easy to see why sales and use taxes may be on the rise as states and localities look to recoup revenue to cover additional budget burdens as well as shortfalls created by their Covid-19 response initiatives.
To help you manage these increased risks related to sales and use tax, Avalara has compiled this downloadable guide, “Sales and use tax audits in 2021: How to prepare your business ” to support accounting professionals as they work with their clients to address the areas of highest sales tax risk in their businesses and to help them prepare should they be faced with a sales and use tax audit.
Make sure to also register for the Insightful Accountant webinar, "Sales tax for accountants and top reasons to automate" on June 17. You can register here.
What your firm needs to know about risks related to increased sales and use tax audits.
While ensuring that your clients stay in compliance and current on their sales tax filing, it’s also key to be aware of the specific factors which make a business more likely to be audited. Taking note of these risks now is critical to helping clients avoid unexpected sales tax bills and penalties, which may result from the audit process.
For example, here are four red flags for potential sales and use tax audits:
- Previous audits, especially if a business has a history of negative audits.
- Reporting a high sales volume of taxable goods.
- Reporting many tax exempt sales.
- Having a high ratio of exempt sales to total sales.
Consider which of your clients may have these types of issues and be proactive in giving them fair warning about the increased risk as well as the need to address them appropriately. The “Sales and use tax audits in 2021: How to prepare your business” is a good starting point for consultation and for developing an action plan in these situations.
State and local taxing authorities are prioritizing sales and use tax collection. Recent reports show that several states have launched sales tax auditing programs which have netted them millions of dollars in unreported and unpaid taxes. Consider whether your firm is equipped to monitor the jurisdictional requirements of each state and locality for sales tax rates, rules, and geographic differences. If you can’t do this efficiently, then it will be difficult to control how much your clients’ businesses must collect for this tax when they make a sale.
An automated sales tax product, like AvaTax, will compute sales tax based on location, item, legislative changes, regulations, and more—simplifying this critical function.
Sales and use taxes should be an area of concern for all businesses—but especially those in four key industries. A joint study by Peisner Johnson & Company and Avalara found that nearly 60% of audits are focused on just four industries: retail, manufacturing, wholesale/distribution, and construction.
If you have clients in these industries, it’s imperative that you work with them to reduce their chances of a sales and use tax audit. Another important strategy to help your clients in these industries is to automate the sales and use tax tracking and processing function with a tool such as Avalara.
Automated sales tax management enables you to accurately perform in-house calculations of your tax without the burden of having to add personnel to track down rates in each jurisdiction, make changes to manual tax tables, and try to stay current on regulations.
Unregistered remote sellers are under the sales and use tax microscope by state taxing authorities. If you have ecommerce clients, you should also be aware that the majority of states, the District of Columbia, and even some local governments in Alaska, now have economic nexus laws that create a tax obligation based on sales or transaction volume, meaning physical nexus is no longer the only trigger for sales tax obligations.
Again, this is where utilizing an automated sales tax management tool will give your firm and your clients the ability to stay ahead of potential sales and use tax problems while freeing you from having to manually capture the required information on every sale related to the purchase address and making sure it is geospatially verified for the most accurate rates based on street-level tax rates rather than relying on less-accurate zip-code only rates.
Being proactive now can help your firm protect clients from Covid-related sales and use tax audit risks. After you download the guide, consider how your firm is currently engaging in sales and use tax risk management for its client base. Given the new focus from state and local taxing authorities on sales and use taxes, this is an area that must be addressed in order to help your clients avoid a sales and use tax audit.
Avalara’s automated tools for sales tax compliance and management are designed to support your firm in reducing sales and use tax audit risks by working across the applications that manage sales transaction data, whether you’re running a single platform or an omnichannel system. With 1,000+ signed partner integrations, you can choose the ones that work best for your business, without being locked in. As a QuickBooks ProAdvisor, Business Consultant or Accountant the Avalara Partner Program can also help you mitigate sales tax risks for your clients.
Make sure to also register for the Insightful Accountant webinar, "Sales tax for accountants and top reasons to automate" on June 17. You can register here.