State and Local Tax Compliance: 5 Tips to Minimize Exposure and Maximize Revenue

With catalogers today marketing their goods through a variety of channels, marketers should carefully evaluate each channel using an internal auditor or an outside tax expert to determine the necessary steps to effectively and fairly calculate and remit sales taxes.

Start by asking a few key questions about yourself and your organization:

* Are you confident your organization is on top of state and local tax requirements?

* Are you concerned about the tax administration and management practices of a company you recently acquired or with which you’ve merged?

State and local tax legislatures change frequently. The revenues from tax dollars, as well as the heavy penalties levied for noncompliance, are depended on to fund important state programs, including transportation infrastructure, education, health care and a host of social services.

As a multichannel marketer, though, your focus should be on accurately calculating taxes, collecting them from your customers and avoiding audits. The trouble is, many multichannel marketers think the taxation process is little more than multiplying a rate by an amount. In reality, calculating tax is a truly complex business process.

Here are five critical tips to ensure your state and local tax processes are compliant:

1. Have someone review your business practices and legal entity structure for tax nexus.

Before they can collect taxes, marketers must determine their nexus — a connection with a state such as business activity or physical presence that subjects you to such tax laws. These rules vary state by state and can include criteria such as having your own delivery fleet to provide goods in a particular jurisdiction.

2. Register your company as a taxpayer in the necessary state and local jurisdictions.

Consider state as well as local, city, county and jurisdiction tax rates to determine the combined sales tax rate of any given address or physical location. The potential combinations of these tax rates exceed 7,000 in the U.S., creating a significant challenge for retailers to keep up with and manage manually.

3. Appoint someone to track rate and tax rule changes to remain compliant and avoid exposure to audit penalties and interest.

States generally have a combination of rates (state, county, city, district and other local municipalities), and annually there are more than 700 tax rate changes that occur across the country. Pinpoint an individual to be responsible for keeping your business aware of these changes. This can be done through technology solutions or manually, although the latter puts you at significant risk for error and audit penalties.

4. If you have significant sales tax collection and remittance amounts, reserve a reasonable amount of cash to allow for expenses to cover process errors that may lead to penalties.

Each state has legislation that defines the different taxability of goods, typically known as tangible personal property or services sold within a given jurisdiction. When computing tax manually, you have a greater chance of erring on the range of variation in the rules.

5. Investigate tax automation solutions that can help minimize your exposure and expense, and focus your staff on more strategic initiatives.

Rates aside, states, and sometimes localities, publish special calculation algorithms that cap or set minimum/maximum thresholds. Or they exempt tax on specific holidays or for specific segments of the population. The intricacies of the rules have become overwhelming to implement on a manual basis. Technology solutions that help marketers keep up to date on tax rates at all levels and apply them during each transaction can help you consistently maintain accurate tax remittance.

In addition, depending on your legal entity structure and business practices, you may want to consider investing in automated tools to ensure compliance and help you correctly budget funds for tax payments and potential penalties.

Managing taxes can be a tricky and time-consuming process for marketers — one that can prove costly if not done right. Keep these tips in mind to achieve tax compliance, avoid penalties and boost your bottom line.

John Cowan is director, oracle and retail solution practices at Vertex., a provider of advanced tax technology solutions. For more information, go to www.vertexinc.com .