Learn which business processes help to ensure you stay in compliance with state and local taxes
As a business owner or executive, you want to ensure you are staying compliant with state and local taxes in case of an audit that will cost your company time, resources, and possibly extra penalties and fees. The best way to stay in compliance with state and local taxation is to create business processes that allow your company to keep up with the changes in any state you are doing business. Better yet, solid processes help give company leadership the information they need to make better strategic decisions.
In order to stay in compliance with sales and use tax, these are the business processes your company should monitor and keep up-to-date as laws change.
- Purchase orders
It is a good idea to estimate the sales tax on your purchase orders for several reasons, including letting the vendor know you are expecting to be charged. If the sales tax is not included, you are required to take the extra step of reporting consumer use tax to the taxing authorities. - Customer Information
If you have a database of your customers, you should consistently update their information to ensure the proper sales tax is being applied so you do not overcharge them. Although this process plays more to customer satisfaction, it can also give you information on your customers and their locations, which can help estimate the amount of sales tax you are expected to collect. Plus, if you have nexus in another state, you need to collect sales tax from customers in that state. In IL, sales tax is determined on your company’s location rather than where the customer is located. Most other states are determined on the “ship to” address.
TIP: Keep customer exemption certificates on file and current (IL is every 3 years) to help withstand an audit
- Inventory
Check that you have your resale exemption certificates in order when you purchase your inventory. When you do resell the item, be sure to include any final tax calculations. Don’t forget to track items you donate, use internally, or use as a sample, since use tax is usually applies to these areas as well. - Sales
With thousands of taxing jurisdictions and millions of rules on taxation, charging the proper taxes can be difficult. Illinois updates their state and local taxes every 6 months and other states will update throughout the year, so you will need to check all of your systems and make the updates.
Tip: It’s a good idea to watch where your sales are occurring in order to track nexus. If you sell tangible personal property, do you have sales representatives in other states or deliver via a company truck? If so, you may need to check your sales tax nexus. In some states, services are taxable, so be aware of where you conduct business.
- Credit Card Payments
Check that sales tax is being included in the preauthorization process. Credit card charges can fail if the preauthorized amount is less than the total, which could require your company to manually enter the amount to complete the charge. If you are selling online, be sure to consider how your shopping cart is set up to handle sales tax. Not only including sales tax in the preauthorization process keep you compliant, but it also gives your customers a true picture of their purchase.
Having solid business processes in place not only helps to ensure your company is staying in compliance with state and local tax laws, but also allows the company to move into the more “fun” areas such as strategic planning. Having a handle on these processes makes it easier if you have an outside party, such as an accountant, come in to take a look in order to make suggestions. As an added bonus, by keeping up with state and local taxation, you can ensure you are not overcharging your customers.
How DHJJ Can Help
If you are looking for professionals to help manage your state and local tax obligations in conjunction with your business processes, contact DHJJ’s State and Local Tax group (SALT) at 630-420-1360, or fill out the form below.
