Sales Tax Not Included

Don’t know if you live in a place with a back to school sales tax holiday, but if you do, enjoy it while it lasts, which is not likely to be long.  The state scramble to raise more funds is nowhere near slowing down.   A new study done by Aberdeen Research confirms what I’m seeing anecdotally – that states are more aggressively auditing companies to make sure they’re getting every penny of sales and use tax.  Last year 43% of their respondents reported increased audit activity, this year it was 63%.  While much of the discussion about taxation revolves around income taxes, the real money for states is in sales tax.  According to Aberdeen almost a third of state revenues are connected to sales and use tax.

Despite the strong interest on the part of the government, businesses tend not to be really focused on this topic. The net result of that is they are more vulnerable to missing changes in requirements.   A Thompson Reuters Study shows that for the first half of 2011 alone there were 16 county tax changes and 90 city changes.  The prognosis is that it’s only going to get worse.

Not every business is avoiding this topic.  The Don Quixote of sales tax growth is definitely Amazon.com.  The company has started a ballot initiative in California to avoid having to collect sales tax on items it sells in the state.  The state is fighting back proposing legislation that would make any referendum useless. Regardless of who wins, the issue for businesses once all the dust settles is then figuring out how to comply.  This is particularly difficult when you get to the issue of out of state sales and online sales. 

Despite Amazon’s aggressive stance, generally states are working diligently to expand the definition of nexus.  That means the rules that determine if your business activities in a state are subject to tax are heading in the direction of making it more likely that you will face some sort of tax.  The Aberdeen study and (I think) common sense suggest that this is an area where you should identify outside resources that can help your business understand specific risks.  Depending on the type of company you are involved with, it may pay to bulk up internally as well.  If most businesses are not watching out for this topic, you can bet it will be a competitive advantage to be proactive.