State and local taxes should be discussed with clients in year-end conversations to prepare for 2022.
State and local tax (SALT) refers to the taxes businesses are obligated to collect from sales of goods and services, then remit to each particular taxing jurisdiction that the sale took place in—even if it was a virtual sale. SALT processing is when accounting firms help their tax-paying business owner clients manage the process of collecting the tax appropriately and remitting correctly, on time, and to the proper jurisdictions.
SALT processing can help clients prepare for the next fiscal year by mitigating state and local tax noncompliance. Bringing up tax collection and remittance with clients will inform firms on which of their clients will be requiring state and local tax advisory in the coming year. Firms should incorporate discussions about sales tax into year-end conversations with clients. Here are 5 sales tax topics that clients—and firms—need to know about before heading into 2022:
1) Talk About Changed Nexus Laws
The 2018 Wayfair ruling set the stage for states to begin taxing remote sales based on economic nexus. Now, having a physical presence in a state is no longer the only qualifier for collecting sales tax. Few companies selling their products and services online understand economic nexus rules or have the capacity and capability to manage their sales and use tax compliance. If businesses sell using an e-commerce platform, they’re responsible for determining when they trigger economic nexus in a state, registering with the state, and collecting and remitting sales tax on sales in that state. Depending on the jurisdiction, economic nexus can be established either by having a certain number of transactions in a state or exceeding a dollar amount of revenue from sales in that state.
Because each state has its own economic nexus criteria, identifying whether economic nexus has been established is easier said than done. It’s a lot of work that takes careful attention and time. This complexity creates a significant compliance risk for remote sellers that could cause tax-related problems and penalties down the road.
2) Discuss New Monetary and Transactional Thresholds
After the Wayfair ruling, the threshold that determines whether or not a business has economic nexus in a jurisdiction changed. Now, most states follow South Dakota’s economic nexus threshold, requiring remote sellers with sales of $100,000 or more or over 200 separate transactions to pay taxes. Some states have alternative thresholds, though keep in mind that these are liable to change yearly:
Arizona’s threshold is $100,000 in sales with no minimum transaction volume
California’s threshold is $500,000 in sales with no minimum transaction volume
New York’s threshold is $500,000 in sales AND 100 transactions
It’s critical for online business owners—even if they only dabble in e-commerce in addition to their brick-and-mortar business—to know whether or not they qualify for physical nexus, economic nexus, or both. It’s easy for businesses to get confused, especially if they aren’t perfectly organized and sell online in multiple states. The best way for businesses to be sure about their nexus status is to work with an accountant or tax advisor who can help them with their state and local taxes. Working with a professional can help save companies from fines and penalties that may result from noncompliance.
3) Make Sure Clients Know About Potential Fines and Penalties
Businesses that aren’t compliant with economic nexus laws could be subject to fines, penalties, and sales tax audits from multiple jurisdictions. Companies should monitor their status on a quarterly basis because some states implement nexus throughout the year, not just annually. A failure to file can be unintentional, but it’s common, despite being easily avoided. Ignoring or dismissing nexus rules can result in civil and criminal statutes. Civil statutes mainly apply to a failure to file and a failure to pay. A failure to file and failure to pay are considered two separate violations, so businesses can potentially end up with two penalties ranging from 1 to 25 percent of the sales tax they owe—which can be sizable. Finally, criminal penalties can occur if a company fails to pay taxes with the clear intent of evading payment or if sales tax has been collected but not remitted to the respective jurisdictions.
4) Explain Why Businesses Need SALT Processing
It can be challenging for clients to stay up-to-date with tax rate changes and all the necessary reporting required by each jurisdiction. Many businesses put a lot of focus on income taxes and end up neglecting the sales tax arena. If their accountant isn't performing a sales tax review and handling reporting and compliance for them, they may mistakenly assume it's not an issue—at least until they receive a nexus questionnaire from a state in which they don't have a physical presence and haven't been collecting sales tax. Advisors and CPAs need to know how state and local tax rules have changed and what those changes mean for their clients in order to better serve them. Having a thorough understanding of state and local tax rules can help accountants save their clients from fees and penalties that may come from sales and use tax noncompliance. This combination of evolving legislation and client need creates significant opportunities for firms to talk about SALT processing with their clients.
5) Bring Up SALT Processing Before Re-Scoping
Right now, many firms are starting year-end conversations with their clients and looking for new areas to expand upon existing scopes of work. As business clients scramble to prepare for the upcoming tax season and the next fiscal year, make sure that SALT processing is incorporated into any planning meetings to ensure that sales tax advisory services are part of the client’s upcoming scope of work. All sellers need to ensure that their sales, transactions, and remittance are in alignment with each state’s tax laws, so it’s an excellent opportunity to expand services with existing clients. Business clients can have peace of mind knowing they’ll be much more prepared for the next fiscal year when it comes to sales and use tax obligations.
How to Offer Clients the Best SALT Processing
To offer high-quality SALT processing, firms need to provide services that address client needs and potentially reduce their tax liability and risk—and the service line should be scalable and efficient without sacrificing quality. The respected firms that provide SALT processing using LumaTax check all of these boxes. Using our industry-first client exposure survey to generate a LumaTax Compliance Score™, firms can quickly identify the clients most in need of SUT advisory services before any year-end conversations begin.
LumaTax’s features also include an economic nexus analysis tool that completely automates the analysis of transactions to determine whether nexus has been established in each taxing jurisdiction, which saves firms from many laborious hours of cross-checking the numerous thresholds. Utilizing LumaTax allows firms to scale up their SALT processing services without investing heavily in staff and spending hours collecting client data, researching, and applying tax laws from multiple jurisdictions. Many firms outsource sales tax work for their clients because they don’t believe they’re equipped—but using LumaTax, this service line is approachable for firms of any size and it can provide significant episodic and recurring revenue.