CPA: “Hey! I’m so glad to be able to catch up with you – it’s been a while. What’s on your mind?
Client: “I was talking to my friend who owns their own business, and they just found out that they owe the state a ton of money in uncollected sales taxes. They were still in a state of shock.”
CPA: “…and you started wondering if it could happen to you.”
Client: “Absolutely. I don’t want to get blindsided by an audit. Should I be worried? What should I do?”
If you haven’t already had some version of this conversation with clients, you may want to start preparing for it. It’s been over three years since the landmark South Dakota v. Wayfair ruling, which determined that states can broadly require online retailers to collect sales tax even if they lack a physical presence - expanding nexus. Many states enacted their economic nexus laws within six months of that decision, and most have a three-year statute of limitations for uncollected sales taxes, which means now is the time for state and local taxing agencies to audit online sellers with economic nexus.
Since the 2018 ruling, consumer behavior has evolved dramatically, largely due to the pandemic. E-commerce has exploded, resulting in more businesses with multi-state sales activities and a greater and more complex set of sales and use tax needs. The Wayfair ruling was a big deal for businesses before the pandemic. Now it’s an even bigger deal.
State sales tax rates did not increase during the pandemic; however, city and district sales taxes have risen rapidly and are on pace for a record-setting year. “States are reluctant to raise their sales tax rates because they know that the increase in sales tax can be regressive,” explained Mike Bernard, Chief Tax Officer at Vertex. “We saw the same thing during the recession of 2007-2009. However, changes below the state level have been abundant. We expect the frequency of new and changed city and district sales taxes to continue.”
In its Mid-Year Report, Vertex shares statistics on sales tax changes that tax professionals should notice:
- State-level sales tax rates continue to be stagnant:
- There were no state sales tax changes in the first six months of 2021. The last state-level sales tax rate change occurred in 2019.
- District-level and city-level taxing agencies are making sales tax rate changes at a record-pace:
- There were 127 new district sales taxes enacted in the first six months of 2021, up 88 from the same time last year. This trend continued in July 2021, with 36 new district taxes enacted.
- In the month of July 2021 alone, 22 new city taxes went into effect. The total number of new city taxes for the first six months of 2021 was 23.
- The average number of changes per month to city sales tax rates for the first six months of 2021 was 22 per month. In July of 2021, there were 54 city rate changes.
Clients can’t ignore sales and use tax anymore. Neither can you.
Clients who are non-compliant with the growing web of sales and use tax regulations at the state and local levels could be facing catastrophic risks to their businesses. Perhaps even worse, many don’t know they are at risk, and don’t understand the implications of their exposure. This is a critical moment for businesses, small and large. Accounting firms can solidify their role as a trusted advisor by proactively protecting their clients from the mounting risks of sales and use tax non-compliance.
Where should you start? First, determine which clients are at greatest risk, and where. Sales and use tax requirements are applicable to many different industries across a wide range of jurisdictions and are often applied in different ways. Some industries targeted most by auditors are:
- Construction and Real Estate
- Digital Goods and E-Commerce
- Manufacturing
- Retail
If you have clients in these industries, it’s time to reach out to them to discuss their potential exposure to sales and use tax regulations. Of course, these aren’t the only industries that should be on high alert. Any business that sells goods into a state where they don’t have a physical presence (often referred to as “remote retail sellers”) is at risk and should be made aware of their potential exposure. Ensure your clients understand the costs and risks of noncompliance, as well as the benefits of complying – all in the context of their bottom line.
Your clients also need to understand the threat of an audit is real. Not only do states have access to clients’ transactional data, but they’re communicating with each other in ways that they’ve never done before, in order to ensure that they have a clear picture of how businesses are operating.
Need a sales and use tax confidence boost? It helps to have the right tools for the job.
It’s easy to feel discouraged by the massive complexity of sales and use tax compliance. However, with the right technology, developed by a trusted partner, you can feel confident in your firm’s ability to meet clients’ growing and complex sales and use tax needs. By leveraging technology, your firm can automate many of the manual tasks associated with tracking regulatory changes at the state and local levels—and understand how those changes apply to your clients’ businesses.
CPA.com has partnered with Vertex, a leader in sales and use tax technology, to help firms navigate the new sales and use tax landscape. Whether you’re seeking guidance on developing a referral strategy or looking to scale up your firm’s sales and use tax compliance practice, we’re here to help. Our Vertex Firm Advisor Program offers an efficient, proven way for firms to ramp up their sales and use tax capabilities, regardless of where you or your clients are in the journey.
To learn more about the resources available through this program, or to learn more about Vertex’s capabilities, visit cpa.com/salestax.
