Pitfalls and Best Practices in Property and Sales & Use Taxes
Most companies face tax obligations related to their property and sales, but given that each state, and many local jurisdictions, have unique sets of laws governing these tax areas, understanding the full scope of these taxes is a daunting challenge, and failure to comply with tax codes can expose a company to significant liabilities.
Below is an overview of key challenges and the latest updates in property and sales taxes, along with best practices to consider for shoring up processes and internal controls.
Property taxes are extremely important to the state and local governments that levy them. In fiscal year 2016, property taxes on real and personal property owned or leased by businesses accounted for the largest share of total state and local business taxes in the U.S. All fifty states allow local jurisdictions to tax the ownership of real property. Thirty-eight states tax personal property, and approximately 11 of those 38 states even tax inventory.
The number of overlapping jurisdictions and regulations are incredibly challenging to navigate. Some best practices include:
- Review property record cards from assessing officials for accuracy. Taxes on real property are based on property values, but often assessors only visit properties every few years. Discrepancies in things like square footage, use of the property or knowledge of construction or improvement efforts can lead to inaccurate taxes being levied.
- Maintain an accurate compliance calendar. Jurisdictions that tax personal property have a number of deadlines for things like returns and bill payments throughout the year, and these dates change fairly often. Developing and tracking these dates across all available localities is crucial to ensure your company submits the required materials on time.
- When in doubt, communicate. Management needs to regularly communicate with the tax department to facilitate awareness of any developments that might impact property taxes. Often, the tax department learns of mergers, acquisitions or property disposal far after the fact, even though these transactions can drastically impact property tax obligations.
When sales taxes were first developed, the economy centered largely on the transaction of physical goods. However, the world has shifted more to focus on more on services, and many goods and services now exist solely in cyberspace, making sales tax collection increasingly complex.
Sales tax obligation is triggered when a company is determined to have nexus within a particular jurisdiction. Current law holds that physical presence is required for nexus, but that may not hold true for as long as states increasingly look to tax revenue gained online. Physical nexus is also more complex than it seems on the surface, and can be triggered by not only a company’s physical presence, but also by the presence of click-through online referrals and even affiliates operating within the state. Economic nexus, a newer form gaining increasing traction, is triggered by varying in-state annual sales and/or number of transactions.
In order to navigate the muddy waters of sales and use taxes, companies should keep these tips in mind:
- Determine the taxability of your products and services. Regular taxability assessments are a crucial element of sales tax compliance, and these assessments rely on updated and accurate product and service descriptions. Companies should consider conducting these assessments more frequently for areas where nexus rules are quickly evolving, like services and technology.
- Stay up-to-date on your own activities, and nexus law developments. Most companies have a good sense of their sales activities in various jurisdictions, but affiliate nexus can fly under the radar. Many states trigger nexus when affiliates provide services, like accepting returns, and some even when they promote products or brands. Nexus rules are also constantly changing, and businesses should be sure to monitor the progress and the impact of ongoing court cases, the most significant of which is currently the South Dakota Wayfair petition at Supreme Court level. Companies also need to monitor annual sales and transaction volumes to determine if they exceed state economic nexus thresholds.
- Collect, validate, maintain exemption documentation. Many companies take advantage of available exemptions from sales taxes. However, significant documentation requirements accompany the exemptions in most cases. Businesses should collect and fully validate all the documentation to accompany various exemptions, and should maintain comprehensive records going back several years. Given the speed at which sales tax laws are changing, they should even consider collecting this documentation in jurisdictions where they currently do not have nexus, just in case nexus is triggered in the near future.
What To Do in the Event of an Audit
Despite their best efforts, many companies will face an audit at some point. And, in the word of Benjamin Franklin, “By failing to prepare, you are preparing to fail.” When facing down audit proceedings, it’s critical that companies manage the process, instead of letting the process manage them. Here are some of our top tips:
- Maintain audit control logs and supporting files to document the audit, including correspondence received and issued, information requests and prompt responses, meetings and documented agreements/settled issues, actionable notices, timelines and actions taken.
- Establish a policy for waivers, including holding auditors accountable to agreed-upon timelines, considering reasonable requests and understanding the ramifications for refusal.
- Follow procedures and timelines. Sometimes pushback is critical, but throughout any protests or appeals be sure to follow procedures and timelines strictly.
For a more in-depth discussion of the latest updates in property and sales taxes that may impact your business, please contact MFA’s SALT Team.
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