Author: Peggi Rockefeller, Chief Tax Officer, and Andrew Hallsworth, Senior Solutions Engineer, at Vertex
26 Jan 2018
The US sales and use tax environment is hugely complex. It involves a confounding network of tax types, rates and exceptions, all with a multitude of variations.
Minor errors can have huge implications, including tax fines, interest and penalty charges, making it important that businesses review US tax implications prior to expansion in the country. It’s vital that all businesses operating in the US equip themselves with detailed local knowledge and data-driven tax technology if they’re to succeed.
America’s tax system is decentralised, meaning individual states, cities and districts have the freedom to decide their own tax rules. As such, identifying jurisdictions and determining rates accurately is a monumental challenge. Furthermore, unlike VAT, US classifications and sales tax exemptions depend not only on the location, but also the product being sold, who it’s being sold to and how it is being used.
For example, in Chicago, sales tax is 10.25 percent, a number that is made up of 6.25 percent state tax, 1.25 percent city tax, 1.75 percent county tax and one percent regional transport authority tax. In Tennessee, there’s a seven percent sales tax on the first $1,600 (€1,374), with 2.75 percent on the next $1,600. In Texas, certain sales of electronic data are subject to tax, but only on 80 percent of the price. In New York, clothing sold for less than $110 (€94) is exempt from state sales tax, but subject to local sales tax.
US classifications and sales tax exemptions depend not only on the location, but also the product being sold, who it’s being sold to and how it is being used
These variations can be confusing, but it’s imperative that businesses understand what’s required of them. Unlike European VAT, which is included in the advertised price, US sales tax is highly visible – literally added on at the point of sale. Retailers risk a class action suit if they overcharge tax, and a hefty audit liability if they undercharge. They also risk tainting the customer’s experience.
In the know
Understanding the basic state and local tax rules, plus using comprehensive tax automation technology, can make a big difference to expanding businesses. There are some unique tax rules international businesses should consider when expanding in the US.
‘Nexus’ is the term used to describe when a business is required to register to collect tax in a jurisdiction. If a business has nexus in a state, it must collect tax on sales there. This is different from form-based VAT registration in Europe, as nexus can be acquired through a temporary or permanent presence of property or people (employees, service people or independent sales/service agents). It even includes sales visits, trade show attendance and temporary inventory in warehouses.
Because each state defines nexus differently, it’s not a straightforward concept. Some states have drafted legislation that taxes businesses even if they do not have a physical presence but do have economic nexus. This means tax administrations are looking at sales and frequency to determine if a taxpayer has nexus. For example, a business that has sales over $500,000 (€430,000) and more than 500 transactions in the state can be determined as having nexus.
State legislation is ever-changing and can cause real confusion for businesses that are simply trying to comply. Automation is crucial to the correct identification and management of nexus. The compliance process is complex, and attempting to process it manually can have negative repercussions for businesses.
Exemptions exist for a range of customers and also differ by state. The responsibility for getting it right falls solely on the seller. If a seller exempts a transaction but does not have the proper exemption documentation, they will be responsible for the payment of that tax due on audit.
In order to eliminate mistakes, businesses must reduce the amount of manual calculations they make
The final challenge of complying with US tax systems is submitting returns accurately. Each month, returns are due at state level, and often at local level as well. All of these returns must be accurate and filed on time or penalties will be incurred.
The road ahead
Complying with the thousands of US tax jurisdictions places a strain on resources, and US states are only increasing their audit activity with regards to overseas sellers. In order to eliminate mistakes, businesses must reduce the amount of manual calculations they make. Automated tax technology can spare tax professionals from making human errors when calculating returns; inflexible, time-consuming workflows can become efficient and accurate processes.
Automation lets businesses verify tax jurisdictions and rates using geospatial technology. Furthermore, automated jurisdictional assignment means addresses conform to USPS standards with full zip codes at all times. As a result, businesses are covered for the most minor change in the smallest jurisdiction.
To reduce the risk even further, businesses can keep important tax decisions in the hands of professionals. This allows in-house finance and tax teams to spend more time on strategic work to support the business, instead of checking rates, rules and manually filing returns.
With changing regulations, as well as additional pressure from tax regimes and non-governmental organisations, the stakes for global tax functions have never been higher. As a result, tax planning and management needs to be more data-driven than ever. Tax functions will need to segregate and allocate data to keep up with more detailed information reporting requirements. This requires more precise methods of analysing and organising data.
To achieve the defensibility that global organisations will require, tax executives need to have a strong plan in place. While the specifics will depend on the unique characteristics of the industry, company and market, tax executives are better equipped to navigate compliance needs with a strong tax technology system.
The best forms of tax technology tend to have the following capabilities: access to standardised quality data; data management and advanced analytics; the ability to consolidate transactional data across multiple systems; the ability to synchronise, transform, and catalogue tax data for future needs; and portals for sharing tax and financial data.
Without automated tax solutions, staying up to date and compliant with tax regulations is difficult and time consuming. Tax technology is not only crucial to successful expansion in the US, it can also support global tax efforts, allowing tax professionals to focus on business strategy to increase the bottom line.