RSM Resources

Facing major budget gaps, state revenue officialsacross the United Statesare leaving no stones unturned as they try to collect unpaid taxes. Given the greaterscrutiny from increasingly aggressive tax authorities, midsized businesses canprepare for possible tax audits by reviewing their sales-and-use taxobligations, and evaluating their compliance processes.

Several strategies provide midsized businesseswith the opportunity to reduce their sales-and-use tax liabilities andsignificantly improve their compliance processes:

• Conduct a reverse audit to identify and recover tax overpayments, or missed credits, exemptions or refund opportunities.
• Perform a sales-and-use tax compliance review to assess compliance with state tax laws and regulations.
• Establish managed compliance agreements by using state-approved models to estimate use tax.
• Participate in voluntary disclosure and tax amnesty programs, where available, to correct past mistakes.
• Determine if it makes sense to register with the Streamlined Sales Tax Registration System, a multistate initiative that facilitates uniform tax calculations and collections.

These strategies, described in more detail below,may help your business comply with its tax obligations and, therefore, stay outof trouble with tax authorities.

Reverse audits
As state officials step up taxenforcement, they are conducting an increasing number of sales- and-use taxaudits, reviewing businesses to determine whether they properly collect and paystate sales-and-use taxes. But sometimes businesses overpay, not underpay,taxes. Many retain tax professionals to conduct sales-and-use tax "reverseaudits," which seek to identify and recover tax overpayments remitted tosuppliers or filed directly as self-assessments of use taxes.

A business can recoup erroneously paidsales-and-use taxes by reviewing its self-assessment of use tax as well asanalyzing the sales-and-use taxes it remitted to suppliers on tax-exemptpurchases. Normally, the buyer is responsible for claiming an applicable taxexemption. However, if the buyer does not claim the tax exemption, the supplierwill charge sales tax. Many companies have their accounts-payable departmentidentify exempt purchases, but they may occasionally pay taxes in error. Aneffective reverse audit can yield increased cash flow, more efficientcompliance processes, and reduced penalties and interest.

Sales tax compliance review
Performing a sales tax compliance reviewcan help a business determine how accurately it is complying with sales-and-usetax laws and regulations. This review helps ensure that the business hasadequate processes and procedures in place for efficiently determining andreporting sales tax, and that it completes its tax returns accurately and ondeadline. The review includes an evaluation of whether the business couldbenefit by using state-approved tax-estimation models or third-party softwareto make the tax-reporting process easier. Because this review requires time,expertise and other resources, a business may want its tax and accounts-payabledepartments to work with a professional tax consultant who can provide a uniqueperspective on how state revenue agencies are treating other similarly situatedtaxpayers.

A typical review analyzes a sample period of thebusiness’s accounts receivable, accounts payable, tax payments and relatedaccounting transactions to determine whether the business is underpaying oroverpaying sales-and-use taxes (or both or neither). If underpayment isdetected, the company and its consultants can work with state tax authoritiesto file amended returns and negotiate a reduction or elimination of penalties.If overpayment is detected, the company can seek to identify and recovererroneously paid sales-and-use taxes as would happen in a reverse audit. Aftertidying up past deficiencies, businesses often turn their attention toimproving compliance processes.

Managed compliance agreements
Many state revenue agencies are receptive to businesses reporting use tax on anestimated aggregate basis using formulary percentage-based models. Instead ofplowing through hundreds or perhaps thousands of vendor invoices each reportingperiod to determine reportable use tax, many businesses employ state-approvedestimation models.

By starting with a representative sample of purchasing activity, businesseswork with state revenue agencies or their tax advisors to establish taxabilitypercentages for certain agreed-upon general-ledger accounts. After thepercentage models are fully developed, the business applies that samepercentage to the select general-ledger accounts each month to report usetaxes. This eliminates the need for accounts-payable personnel to make tax decisionsand creates a more efficient sales-and-use tax compliance process.

Voluntary disclosure and tax amnesty programs
Voluntary disclosure and tax amnesty programs can correct past deficiencies insales-and-use tax payments. Businesses may voluntarily pay back taxes and filelate tax returns with reduced penalties. State governments sometimes offerlimited-time-only amnesty programs, with the goal of collecting as much in backtaxes as possible in a very short period of time — usually two or three months.Most authorities offer a full or partial waiver of penalties so long as aparticipating business pays the entire amount of taxes due, plus any interest,by the program’s deadline. Some authorities impose larger-than-normal penaltiesif a business fails to take action during an amnesty period. Whether making avoluntary disclosure or participating in an amnesty program, a company may haveto sign a settlement agreement, promising to file and to pay all future taxeson time.

Streamlined Sales Tax Registration System
On Oct. 1, 18 states banded together underthe Streamlined Sales Tax Project, which established the uniform registrationsystem. The stated purpose of the initiative is to simplify and modernizesales-and-use tax collection and administration via a uniform, interstatesystem. The real purpose, according to tax advisors? To increase taxcollections from out-of-state vendors on consumer purchases made online, byphone or through the mail. The project addresses traditional brick-and-mortarretailers who are concerned that out-of-state mail-order and online sellersthat don’t collect sales taxes have an unfair pricing advantage.

For a state to levy a sales tax on a transaction,the buyer and the seller must have a business connection with the taxing state.This connection is called "nexus." For a seller to have nexus, andtherefore be required to register, collect and remit sales taxes, the sellermust have physical presence in the taxing state, according to a 1992 U.S.Supreme Court ruling. Simply having a representative enter a state to solicitsales can create this nexus-generating, physical presence.

Keeping track of nexus status has provedcumbersome for states and businesses alike. The project offers severalincentives for businesses to register with the system, including:

Immunity from state tax authorities. To entice retailers and other sellers to voluntarily register,participating states offer sales-and-use tax amnesty. Vendors that registerwill be absolved of past sins, missed payments, unpaid penalties and interest,so long as they agree to collect and remit taxes in the future. The businessesalso must agree to collect and remit taxes for all current member states andthose that join later. Approximately 30 big-name Internet retailers, includingWal-Mart, Target, Toys R Us and Macy’s, have registered. By doing so, theretailers have avoided potentially lengthy and costly litigation over nexus.Meanwhile, the states are collecting taxes on remote sales from registeredbusinesses.

Immunity from collection errors. Registered companies also can avoid liability forcollection errors by either employing the services of a certified servicesprovider (CSP) or using certified software. A CSP is a tax-collection vendorcertified by the Streamlined Sales Tax Project board. All transactions routethrough the CSP for proper tax calculation. The same applies if the retaileruses board-certified software, including certified proprietary programs.

Simplification and reduction in costs. Registered companies also benefit from simplifieddetermination of taxability across participating jurisdictions. Member stateshave agreed to uniform rules and regulations, as well as limitations on thenumber of tax rates they may apply. Therefore, registered vendors — withautomated sales tax calculation solutions — have a much easier time determiningtheir tax liabilities.

Observers expect the next session of Congress todebate proposed legislation to eliminate the physical presence rule embodied inthe 1992 U.S. Supreme Court decision and give states mandatory authority tocollect taxes on remote sellers who have no physical presence within the state.If this happens, businesses that have not voluntarily registered for theuniform system could be compelled to do so.

With state authorities increasing the frequencyand scope of sales-and-use tax audits, it behooves midsized businesses to beaware of their liabilities and compliance processes. Take advantage ofstrategies to optimize your sales-and-use tax position, and you just mightavoid an audit or even recover overpayments and missed exemptions.

Streamlined Sales TaxProject Member States
Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, NewJersey, North Carolina, North Dakota, Ohio, Oklahoma, South Dakota, Tennessee,Utah, West Virginia and Wyoming.