Now that we have had over a month to recover from the July 15 tax return deadline, many firms are looking at opportunities to efficiently add a practice or expand an existing practice to further the goal of being a “trusted advisor” to their clients, not to mention drive revenues during their “slow season.” A proven method of achieving these goals is to offer an array of services to existing and new clients that address a clear and tangible need that can not only make your clients more efficient and productive, but potentially reduce significant tax liability and business risk during an unprecedented time for businesses and individuals.
As I have closely followed tax, business and consumer trends, particularly since the COVID-19 lockdowns began in the U.S. in early March, it has become increasingly clear that there is one tax type in particular that has a direct and constant effect on many of the roughly 31 million small businesses (over 90 percent of all businesses) in this country. This is the sales and use tax (SUT) that is imposed by 45 of our states (and an estimated 13,000 local jurisdictions) on sales of goods and some services. Most of the Top 100 CPA firms reportedly are showing significant increases in revenue in their SUT practices.
Why sales and use tax, and why now?
Two years ago, SCOTUS in South Dakota v. Wayfair expanded the reach of states across the country to impose SUT obligations on retail and other businesses on the basis of economic activity in a state (so-called economic nexus), not physical presence.
In March, consumer behavior and the way many businesses operate changed dramatically as the pandemic spread across the U.S.; individuals were told to stay home, and brick-and-mortar stores were forced to close. Many small businesses established or greatly expanded their online selling presence and capabilities. That has resulted in an explosion in e-commerce and remote selling, and a significant increase in online sales tax revenues in most states. State officials have reported to me that sales tax collections from online sellers are up 30 percent and more in many states. The increases in online sales tax collections has been the one bright spot for state tax revenue collections during the pandemic.
As more and more online and other businesses sell into new states and municipalities, they risk becoming subject to registration, and sales tax collection and remittance rules there. The impact will be felt primarily by smaller unsuspecting businesses that make sales in states where they are not physically present or collect sales tax, including many of Amazon’s third-party sellers and sellers based outside the U.S. In fact, many small businesses have already received sales tax audit notices and need guidance and representation.
CPA sales and tax audit practice services
Typically, your clients already consider you to be their expert in all things tax. Many may assume that if you’re not doing sales tax review, compliance and planning for them, they don’t need to worry about it. Given the huge increase in potential and unexpected sales tax liabilities, even the potential for state auditors looking to prior years where the business had nexus but didn’t file a return, the potential risk could destroy a small business.
The three biggest risks with state sales tax compliance faced by your clients are:
- Undetected nexus: Comprehensive and continual nexus reviews have not been performed.
- Under-collected tax: As I mentioned above, 45 states and over 13,000 local jurisdictions impose sales and use taxes. Rules and rates change frequently. We’ve seen that increase to even higher levels during the pandemic. In the first six months of 2020, 150 local rates changed, mostly increasing. Filing dates were extended by most states to a variety of dates. Tracking this enormity of changes is particularly challenging.
- Tax collected and not remitted: This typically occurs when sales tax is collected, but returns have not been filed.
Most CPA firms that have sales and use tax practices generally divide services offered into three categories:
Planning
- Nexus studies for economic and traditional business activities;
- Voluntary disclosures or amnesty program packages;
- Taxability determinations;
- Product and service taxability review, including exemption certificate management;
- Reverse audits for tax recovery and cash conservation.
Compliance
- Full outsourcing of the sales and use tax compliance process;
- Interim services;
- Registrations;
- Taxability determinations and advisory services.
Audit support
- Audit management and support;
- Reverse audits for tax offsets and cash recovery;
- Audit strategies and assessment protests;
- Audit appeals, negotiation and settlement.
Benefits to your clients
These services can provide several advantages:
- Reduce headcount, provide hard-to-find expertise and produce other cost savings for a client’s business;
- Reduce the impact on other departments in the organization who have roles in the compliance process such as accounts payables, treasury, etc.;
- Improve compliance accuracy, which will reduce audit exposure and financial risk to you and your business;
- Improve efficiency and accuracy and reduce risk while freeing up key resources to focus on higher-value tasks — business and tax strategy and planning in an ever-increasing competitive and regulatory landscape;
- Introduce and implement new technologies — such as artificial intelligence, IoT (internet of things), data analytics and big data — for a client’s business, reducing costs and improving productivity;
- Look objectively and with “fresh eyes” across the client’s industry and competitors;
- Work directly with tax and revenue authorities in all jurisdictions where you do business;
- Leverage the knowledge gained from other clients and leverage those relationships;
- Bring rates and rules tracking, sales and use tax compliance, audit preparation and defense together under a single, expert source.
Next steps
Firms often believe that the only way to effectively establish a new practice or expand an existing practice in sales and use tax is to invest heavily by bringing in expert staff and partners. Not only is this costly, but it’s time consuming. Some CPA firms have taken a different approach, partnering with sales and use tax software companies. Typically, the CPA firm will recommend to clients the use of the software for tracking rates and rules, collection, remittance and ultimately filing returns. The software company will onboard and train the client’s staff and provide access to company data to the firm when necessary, e.g., planning and audit defense.
In addition, third-party companies who offer sales and use tax software products employ experienced sales and use tax CPAs and other professionals who can provide “managed services” to support the CPA firms in working with their clients with respect to most areas of compliance in addition to planning (e.g., exemption certificate management), and audit support services (providing necessary documentation for positions taken and the basis for coding and calculating tax due).
As states and cities respond to the loss in revenue from the economic fallout of the COVID-19 pandemic, accountants will need to help their clients stay informed about any sales and use tax increases imposed on their businesses.
