The Sales and Use Tax Audit Series: 2nd Blog- The Mini Sales and Use Tax Audit
Today’s blog is the second in a series of 5 from our “Sales Tax Audit Series – For California and Beyond.” In this blog we discuss the self-audit. In our first blog we called the self-audit a “Mini Sales and Use Tax Audit” or an MSUTA. The purpose of the MSUTA is to be proactive and protect a company from a future bad audit outcome - an unexpected material tax assessment. The MSUTA is very much like your annual medical physical; like an annual health physical, the MSUTA is done to catch problems early and correct them. Like a physical, the MSUTA consists of tests, analysis of the results of the tests, and a prescription for correcting problems.
On the 5th Anniversary of The Wayfair Decision - The Impact of Economic Nexus on Small and Mid-Sized Businesses
As we get ready to acknowledge the 5th anniversary of the US Supreme Court’s groundbreaking ruling in South Dakota v. Wayfair (June 2018), we wanted to revisit and summarize the ramifications of that decision as we sit here 5 years later. Small and mid-sized businesses are finding themselves in a tax landscape that continues to evolve due to the introduction of economic nexus laws over the last 5 years. It's essential for these businesses to grasp and navigate these laws to stay compliant and steer clear of potential penalties. In this article, we'll delve into the concept of economic nexus, discuss its impact on small and mid-sized businesses, and offer practical advice for successfully managing this intricate tax environment.
Navigating Food Sales Tax Exemptions and Exclusions - A More Digestible Guide
Navigating food sales tax exemptions and exclusions in the United States can be a formidable task, especially for businesses operating in multiple states. By understanding these nuances, and then adhering to the relevant tax reporting requirements, you can ensure a smooth and hassle-free experience in your tax obligations, while minimizing the risk of non-compliance.
So, without further ado, let’s unpack some sales tax intricacies in the food industry, with top compliance tips to follow, so that you’re undoubtedly empowered when the taxman comes knocking.
The Sales Tax Audit Series- For California and Beyond
The Sales Tax Audit Series – For California and Beyond
Over the next several weeks we will post five blogs that should interest any taxpayer who is in fear of a sales and use tax audit – especially an audit that results in a “huge, unexpected liability.” These five blogs will help prepare you for all aspects of a sales tax audit by a government agency (before, during and after) and, more importantly, will help to put you on a path to owe little or nothing (you might even get a refund) – particularly if you follow the second of the five blogs, where we’ll talk about shoring up your systems before an auditor even shows up.
Mississippi Reverses its Stance on Taxing SaaS
As businesses both utilize and develop technology product including electronically downloaded software and cloud computing or Software-as-a-service (“SaaS”), the taxability of these products continues to be varied and can be confusing.
The SaaS model continues to be a very popular method of delivering software to users. If you are a frequent reader of our blogs, you know that many states tax the SaaS revenue stream and many do not. In this article, we take a look at how the rules in Mississippi have recently become more defined in this space and the state has changed its taxability of SaaS.
Texas & New Mexico and Sales Tax- SaaS, Software and More
Last month, we changed our format of our State of the Month posts by doing a “compare and contrast” between 2 states – California and Washington. This month, we continue our blog series with a contrast of a couple of southwest states – Texas and New Mexico – specifically their treatment of technology items for sales tax purposes.
Wait! Already know you need help with Texas or New Mexico issues? Please reach out to us at info@milesconsultinggroup.com
Software as a Service (SaaS) in Texas vs. SaaS in New Mexico
Software as a Service (SaaS) is subject to sales tax in several jurisdictions across the country. Approximately half of states (and some local jurisdictions) do tax the SaaS revenue stream. As you’ll see below, both states are aggressive regarding their treatment of sales tax.
California & Washington and Sales Tax- SaaS Software & other
If you’re a regular reader of our blogs, you know that we have, for the last few years, featured a different state of the month, and have profiled a number of things about that state. After running through the 50 states at least once, we thought we might try something a little different. We’d still like to feature our fabulous United States, but maybe do some compare and contrast in the areas that many of our readers and clients find to be the most useful. We look forward to your feedback.
This month, we contrast a couple of west coast states – California and Washington – specifically their treatment of technology items for sales tax purposes.
Wait! Already know you need help with California or Washington issues? Please reach out to us at info@milesconsultinggroup.com
Sales Tax and Due Diligence in an M&A Deal
The fast-paced world of private equity investment, mergers and acquisitions (M&A) and the art of aligning business interests in the perfect deal certainly sounds glamorous. It’s often where Wall Street meets Hollywood and depicts people reaping lots of money in the process! There are so many components in the making of a successful merger, including synergies between the companies’ cultures and employees, financial aspects, logistics, and other important areas. Tax matters (and in our world, state tax matters) are often the last pieces of the puzzle to be brought to the deal process. And while taxes are rarely the things making the headlines in a transaction, they really are an important piece of the overall transaction – both on the state income tax side (which we’ll discuss briefly below) and the sales tax side. And all the things that we discuss regularly here in our blog – nexus, taxability, look-back, exposure and remediation – they all come up in an M&A transaction. And if the exposure is big enough, it can derail a deal. Unfortunately, we’ve seen it happen!
Sales Tax, Software, SaaS & Consulting- How They Work Together
At Miles Consulting Group, we love software companies. They make up a significant part of our client base (both on-premise software and SaaS companies), our vendor base (of course we license it!), and even strategic partners. And yet, we recognize that sometimes, you just need a person to talk to. On the sales tax compliance side, that’s where we come in.
There are sales tax software companies out there (some of whom are our strategic partners, so this is where this fine line we walk gets a little curvy) who will tell companies how easy it is to “bolt on” their solution to billing or CRM systems. With the flip of a switch, sales tax compliance can be done monthly…if only the company knows where it has created nexus, knows exactly how to code its products, and has properly contemplated the ramifications of dealing with retroactive liability and also, possibly, income tax. We built a lot into that last sentence. Here’s why – it is never as easy as flipping a switch. We all know that, and yet, we realize how tempting it is for companies out there to want to jump to the “easy” software solution.
In this blog, we want to share some very common questions we get from clients and prospective clients, and share why the “people element” is still a necessary (and vital) element in the sales tax compliance equation. Let’s start with a few basic requests that we frequently encounter.
Can You Help us with Sales Tax Registrations in Multiple States?
Of course we can! But let’s ask a few questions first.
- Do you have nexus? Nexus can be of the physical presence type (employees or independent contractors, an office, or inventory within the state), or economic nexus (a certain threshold amount of sales – often referred to as Wayfair nexus in honor of the 2018 US Supreme Court case).
- If so, when did you create it?
- Many of the sales tax compliance software companies don’t talk much about retroactive exposure. Their sales people are focused on signing clients up for future software sales. We know, that sounds a bit cynical. But, we’ve had many conversations with clients who buy the software without really considering their potential retroactive exposure (more on that below).
- If you have created nexus some time ago (2020, 2021), are you prepared to deal with paying any tax which may have been due from those time periods? Have you considered voluntary disclosure agreements (see below)? Have you reached out to any customers to determine if they may have self-remitted the tax already, OR can you go back to customers to collect that back tax that you may not have collected? (Oh what a Pandora’s Box!)
- Have you considered the income tax ramifications of registering for sales tax? If you’ve created physical presence (and in some cases economic nexus), you might also have an income tax liability and filing requirement. S Corporations and LLCs have particular challenges with multistate filings because of their flow-through nature. Oftentimes, sales tax compliance software companies only consider the sales tax ramifications. We’ve seen clients be in difficult situations as a result.
In summary, with regard to registrations, our software colleagues may not always ask these questions. We do. It makes the overall compliance process much smoother to ask those questions up front.
Do We Need a VDAs?
Well, it depends. First let’s define what it is. A voluntary disclosure agreement (VDA) is essentially a legal contract between the state and the taxpayer, where both parties agree to certain stipulations as a premise of the taxpayer coming forward to pay retroactive taxes that are due, so that they can ultimately register in the state and begin to file prospectively. Generally, the state agrees to a limited lookback period (3-4 years) and will waive penalties. The taxpayer agrees (under penalty of perjury) to properly report and pay the taxes owed for those agreed upon periods.
There are multiple steps in the VDA process. Generally a taxpayer can remain anonymous for a period of time (and there are advantages to that), so it behooves a company to hire a third party to assist with the process. Also, companies like Miles Consulting have many years of experience in filing VDAs with various jurisdictions. Like so many things that we do with clients across the states – the process varies from state to state, and we know the nuances.
As with the registrations above, there are questions that we believe should be considered when contemplating going with VDA route.
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- Should we just automatically do a VDA in all states?
- In our practice, we review all the facts of a client’s situation state by state, and if there is retroactive exposure, VDAs are certainly an option that we often recommend. But not all states are created equal, and not all situations are created equal. We take into account the amount of exposure, the level of retroactive documentation that a client may have (for instance with respect to exemptions, resales, etc.), whether or not a client’s customer may have self-assessed tax, and other items. These all play a part in our recommendation to file for a VDA or not. In our experience, oftentimes the software companies will push clients to file VDAs in many states before asking important questions, which can lead to over-selling modules and creating burden for the client.
- What about income tax?
- We have found that many software companies don’t ask the income tax questions. While companies are often eager to take care of the sales tax matters, we never recommend to handle them without considering all the ramifications. As such, we look at a client’s whole picture – not just sales tax – when recommending VDAs.
- Should we go through the Multistate Tax Commission (MTC)?
- The MTC is a coalition made up of state Departments of Revenue personnel (with input from the taxpayer community) that offers a VDA program under which taxpayers can file multiple VDAs in one place. In short, we rarely, if ever, recommend this approach, as it takes it out of the hands of our client and into an area where they relinquish a fair amount of control.
- Should we go through the Streamlined Sales Tax (SST)? – See above re: MTC…for all the same reasons!
- What about simply registering and back-filing needed returns?
- This is a very viable option for clients in states where estimated retroactive exposure is not as material. Under this scenario, a client might have either a shorter exposure window (say 18 months or less) or a smaller amount of exposure. While a state may not necessarily statutorily waive penalties under this approach, it may be more cost effective overall to take this approach. At Miles Consulting, we generally work with our clients on a combination of VDAs and registration and back-filing. Again, we help our clients to analyze the best course of action in each state. It’s not a cookie-cutter approach.
- Should we just automatically do a VDA in all states?
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Sales Tax Compliance – What are the Options?
Obviously, gone are the days when people put pencil to paper, prepare a return and send it in! Right? Certainly, for the most part. There are still situations (for companies who have few filings and no multi-state exposure) where a company might essentially manually fill out a return on-line and monthly or quarterly file that way. But most of our clients are multi-state taxpayers and file in many states. As such, they really do need a software solution of some kind. And there are many good sales tax software providers out there. These companies have various modules that customers can purchase – often within a bundle – and pricing tends to be very aggressive. This is where the road we travel often becomes difficult to navigate. We KNOW there are good software and SaaS solutions out there. In fact, we, of course, also use software to assist our clients with compliance. However, it is our contention that the right solution is the one which incorporates both software and the human element of consulting. For all the reasons we’ve mentioned above, AND as it relates to the implementation of a sales tax software model, it’s just not as simple as buying a software solution. There are many things to consider, and it truly must include the human element.
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- Is it Plug & Play?
- No. One of the biggest concerns for clients is that they really want to become compliant for sales tax – and soon. And in the process of trying to become complaint they often unwittingly purchase all the modules offered without really knowing the ramifications. This is because software companies aggressively price the bundled solution – but not everyone needs it all. Most important, a company must deal with retroactive exposure before registering and moving forward.
- Coding
- As part of the software integration process (so that that sales tax software can talk to the client’s ERP or billing system), the company will need to code its revenue products to talk to the software. Once this coding occurs, the sales tax software will then return, by state, the correct taxability of a particular product (like SaaS, hardware, or professional services, for example). However, the software providers don’t always share that up front. Customers buy the software, thinking it’s a one-stop solution only to find that they need to properly code their revenue items. Bottom line – we help with that. The software companies generally do not. Human element!
- Unusual products (for example - digital goods, mixed services, SaaS)
- What about properly coding a product that might have mixed use elements or not be clearly defined in the software company’s coding? We work with clients to really understand their revenue streams and help to perform proper coding – so that the correct amount of tax is charged on the front end. That is, the client collects and remits the correct amount from its customer. We often consult with clients on bundled items which might include some taxable components and some non-taxable components. This is a common area of concern for many companies. We help with that. Software companies? Not so much.
- Is it Plug & Play?
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Software vs. Humans
As we prefaced at the beginning of the blog article, we truly do believe that a software solution for sales tax compliance is the right answer. However, we also believe that clients are better served when their implementation team includes the right mix of state tax consultants, software, and integration experts. Unfortunately, we sometimes find that the software companies try to be the “one stop shop” for those services. But, when the ultimate goal is to sell software, we believe there’s often a conflict to push companies to buy as much software as possible up front, when many times, the answer is more human interaction to analyze the best mix of consulting and software.
As the humans in the equation, we at Miles Consulting invite you to have a conversation with us to determine how we might help you evaluate your potential sales tax compliance situation. Contact us at info@milesconsultinggroup or 408-266-2259 to schedule your complimentary consultation.
Happy 21st Birthday Miles Consulting!
Every year as the calendar flips to March, I get a little nostalgic as I remember back to 2002, and the founding of the firm.
As many of you know, it’s a big step to quit a paying job and decide to hang out a shingle in the hopes of building that better mousetrap, taking control of your own destiny, and the lofty goal of making even the whole world a better place, one client or customer served, at a time. I decided to take that leap – along with a partner in spring of 2002. And I’ve never looked back in regret at that decision. I just look back to reflect, review and take some pride in what our business has become.
