Protect Your Business with a Sales Tax Due Diligence Review

What is sales tax?

Sales tax is a transaction tax levied by State and local governments on goods and services purchased by consumers. This is different from income taxes which are paid by individuals and businesses on their earnings. Sales taxes are collected by businesses on behalf of the government at the point of sale. The rates and regulations governing sales tax vary from State to State. This adds complexity for businesses that operate in multiple States.

A company must be aware if it has sales tax nexus with a State.? Nexus means having sufficient connection with a State to require a taxpayer to follow the sales tax rules in that State which include registering, collecting and remitting sales tax.

What is physical nexus and economic nexus?

There is physical nexus and economic nexus.? Having a physical presence such as office space, employees, or inventory can create physical nexus in a State.? Economic nexus can be established by businesses that have a certain sales amount or number of transactions into a State even though they have no physical nexus to that State.? Once nexus is created these businesses now have a registration, collection and remittance obligation.???

The importance of a sales tax due diligence review

A sales tax due diligence review is a key part in achieving compliance and mitigating risk. Understanding sales tax laws can be overwhelming for businesses, especially those that have sales in multiple States.? As companies expand, a sales tax due diligence review becomes crucial.

What is the process of a sales tax due diligence review?

A sales tax due diligence review involves a thorough examination of a company’s sales tax compliance processes. Additional aspects include analyzing practices and historical filings. This review serves several crucial purposes:

1.????? Reviewing Compliance Requirements: Businesses may inadvertently overlook sales tax obligations due to evolving laws and changes in business operations.? This may uncover potential liabilities that may arise from incorrect tax filings or unfiled returns.

?2.????? Remittance Strategy: Provide the company with the opportunity to develop a plan to mitigate identified risks. This allows companies to proactively address issues such as filing for a Voluntary Disclosure in the jurisdictions where there is a potential liability.

?3.????? Registration Plan: Once the jurisdictions and remittance strategy have been addressed, the company will have to register to do business in each State and/or local jurisdiction.? In some cases, this may also include registering with the Secretary of State.

?4.????? Taxability Research: ?If the Company is unsure of the taxability of its products in any jurisdiction, as part of the due diligence review, a comprehensive review of the taxability of its products is recommended.

Performing a sales tax due diligence review is essential to help businesses reduce the risk of receiving a notice from a State that it was unaware it had nexus in. ?As sales tax laws continue to change, staying proactive and updated through regular due diligence reviews ensures that businesses remain compliant.

-Article written by Bryan DeMarchis II.? Tax Specialist at Sales Tax Defense LLC, 2000 Deer Park Ave., Deer Park, NY? 11729.?? Bryan can be reached at [email protected] or 631-491-1500 ext. 17. For more information, visit us at www.SalesTaxDefense.com.