Most of us decide at the beginning of a new year to set resolutions...lose weight, better manage finances or improve ourselves in some other way. As we know, New Year’s resolutions are fairly easy to make but very difficult to maintain. The same holds true for resolutions to improve operations at your company. With the economy still in flux and new state legislatures about to convene, now may be the best time to put into place some practices that will improve your tax department’s efficiency and effectiveness.
This article provides you with the top four areas for suggested resolutions to include on your list with respect to sales and use tax compliance and audit management. As most of you likely do not have direct responsibility for the sales tax area, you should make a point to ensure that those who are responsible review these resolutions and implement any necessary changes to their processes where necessary.
Why Sales Taxes Will Become More Important in 2011
Simply put, the 2011 resolutions set forth by the taxing jurisdictions are completely contrary to those of business. The taxing authorities want to expand the sales tax base, generate more audits, expand statute extensions on lapsing filing periods, and enforce higher penalties. Businesses wants fairer and more reasonable audits, consistent application of tax laws, uniformity in the application of sales and use tax by taxing jurisdictions and, of course, lower taxes. I am willing to bet that the taxing authorities will see many of their resolutions fulfilled.
Sales tax rates will increase in many taxing jurisdictions in 2011 — both the tax base and rates are likely to increase in almost every state. States seem hesitant to enact rate increases for income taxes, so sales taxes will continue to be a primary component of most taxing jurisdictions’ revenue. Sales tax is the second highest tax that a business will pay after property tax. The sales taxes that businesses pay are greater than the amount they pay on corporate income tax and unemployment tax combined. Forty-five states, the District of Columbia and thousands of local taxing jurisdictions impose a tax on sales and purchases of materials and services.
New Year’s Sales Tax Resolutions for 2011
The typical sales tax department is responsible for the following functions: (1) collection of tax, (2) remittance of sales and/or use tax, (3) audit resolution and (4) recovery of overpaid tax. Our suggested resolutions for each of these areas are designed to improve control over the sales tax function and increase accuracy in reporting taxes.
Collection Resolution #1: Consider streamlining the collection process through automation of the sales and use tax collection function. For medium to large companies, reducing the human element in tax determination can greatly improve the accuracy of the sales and use taxes reported. Errors occur when manually collecting or accruing sales and use taxes, increasing the time associated with the compliance effort and reducing the efficiency of the department. If you have not looked at this option before, consider performing an internal analysis to determine whether or not implementing an automated tax determination solution would benefit your company.
Collection Resolution #2: Perform a nexus evaluation to determine if your company is operating in a taxing jurisdiction where it is currently not permitted but has a filing obligation. If you decide you have nexus in a jurisdiction, make sure you understand your obligations for the other taxes, in addition to sales tax, for which you may have to become permitted.
Remittance Resolution #1: Streamline your remittance process by automating the return completion process. Just like automating the tax determination function, automating the return completion process can save a company a lot of time and help it gain efficiency in the preparation and filing of the tax returns.
Remittance Resolution #2: Perform regular reviews of the taxes paid on purchases, whether paid directly to vendors or accrued and remitted to the taxing jurisdiction. Someone in the sales tax department should routinely review the taxes associated with significant or repetitive purchases. This process can help to ensure that the correct amount of tax is being paid by the company and reduce the amount of exposure that can be uncovered during an audit.
Remittance Resolution #3: Consider filing a voluntary disclosure agreement (VDA) or taking advantage of the various amnesty programs offered by the taxing jurisdictions. If your company has determined it has nexus in a jurisdiction and has been operating in that jurisdiction for a long time, it is quite possible that your company could have a significant amount of tax exposure as a result. You may want to consider filing the taxes through a VDA or in conjunction with any amnesty programs that might be offered by the jurisdiction. An amnesty program allows taxpayers to come forward to pay back taxes with the state typically forgiving all or part of penalties or interest due.
A VDA also provides several advantages for taxpayers. Most taxing jurisdictions will limit the look-back period to the same statute of limitations period that would be open under audit. Most taxing jurisdictions will waive penalties related to the tax in error, and some will forgive interest or a portion of the interest on the outstanding tax liability.
Audit Management Resolution #1: Reduce or eliminate the backlog of audits. Look to the potential for an audit settlement if the audit is at a standstill or if the auditor has become intransigent. Many audits have been settled for significantly lower amounts than the original assessments through direct negotiation with a jurisdiction’s head of audit policy. If the taxing jurisdiction has a mandate to clear up old audits or bring in tax dollars as quickly as possible, you may find a willing listener for settling the old audits.
If the audit is in appeals, talk with members of the legal division to see if they will work out a settlement agreement. They may decide an agreement is preferable to the risk of establishing precedent on a contentious issue if they lose in a hearing.
Audit Management Resolution #2: When beginning an audit, resolve to manage the audit and the auditor. The sales tax department should always be in control of the auditor, not the other way around. Set deadlines for the auditors and make them adhere to these deadlines. Do this especially if you are concerned the auditors may drag their feet. And while you are at it, assess why you have an audit backlog in the first place. Look at setting goals for the department as to how audits will be conducted, when auditors will report on findings or how to establish protocols for petitioning gray areas.
Audit Management Resolution #3: Request waiver of penalty and interest on all outstanding audits. Once the audit is complete, if there is an assessment, the auditor may seek to assess penalties and interest on the assessment amount. Evaluate the time it took the auditor to complete the audit. If you feel the length of time was excessive, you may be able to get the amount of interest assessment lowered. In addition, the state may be willing to waive penalty and/or interest on other parts of the assessment that are deemed extraordinary.
Recovery (Overpayment Reviews)
Recovery Resolution: Analyze sales and use taxes paid for overpayment of taxes. If you need more cash (everyone does) look to where the money went… and seek to recover those monies that you have already paid in. The easiest place to get cash may be in the taxes that your company has paid to the various taxing jurisdictions or vendors (on purchases). Resolve to complete a sales and use tax recovery project to recover potential overpaid sales taxes. This may be done in conjunction with an audit to offset potential assessments or as a standalone project if your company is not currently under audit. If overpayments of taxes are identified on purchases, consider whether it is best to recover those overpayments directly from the vendor or from the taxing jurisdiction. Remember, the taxing jurisdictions typically pay interest on refunds.
Alvarez & Marsal Taxand Says:
Whether you are able to use any or all of these resolutions depends on how the sales tax department functions currently. Review the four areas with your sales tax department to see if you can improve the compliance function, improve the audit process and recover some overpaid sales taxes.
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As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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