The Top 4 Problems Caused by US Sales Tax Complexity, and How to Solve Them
Unlike some countries, determining sales tax obligations in the United States requires untangling a Gordian knot of complex and ever-changing rates, exemptions, and definitions that vary by jurisdiction.
This level of complexity can create big headaches for multi-location retailers trying to stay on top of their legal obligations. Here are the four biggest US sales tax headaches facing telecom retail.
The complexity of US tax regulations makes them very hard to understand.
In Europe, sales tax is straightforward — it’s all national. Things are somewhat more complex in Canada, which has both federal and provincial sales tax and a patchwork of provinces with and without harmonized sales tax that can make compliance tricky. But, in the United States, retailers are presented with an even more convoluted scenario that presents many layers of challenges, which we’ll explore here.
With over 13,000 sales and use tax jurisdictions scattered across the US, each with its own set of tax rates that can fluctuate frequently, the task of ensuring compliance becomes a formidable challenge. Furthermore, tax is imposed at multiple levels in the US, with 45 out of 50 states levying a state sales tax in addition to local municipal sales taxes.
Additionally, municipal tax jurisdictions can be confusingly complex — such as in the case of a boundary that goes down the middle of a street. All this complexity can make it a real struggle for retailers with multiple locations to determine how much sales tax to collect.
It’s virtually impossible to figure all this out manually and apply tax rates correctly, so retailers will need a technology solution, integrated right into their point of sale, that removes the burden of tax compliance by managing tax collection and remittance across multiple retail locations.
Manually entering tax rates is a pain-staking and time-consuming process where small errors can have disastrous consequences.
Varying product definitions and tax rates aren’t the only tax intricacies that US retailers are struggling with. In addition to the simple challenge of determining which tax jurisdictions apply to which locations, some jurisdictions also have customer exemptions and sales tax holidays. These exemptions and holidays can vary widely, adding another layer of complexity for businesses operating across multiple regions.
Another area of difference can be the products subject to taxation and their corresponding tax rates. What may be taxable in one area could be exempt or subject to a different rate elsewhere. This complexity can cause a lot of confusion for businesses with multiple locations needing to charge tax for the same product differently based on where and how the item is purchased.
For example:
- A customer could be eligible for a tax exemption at one retail location, but not a second location across a jurisdictional border.
- Because product definitions are set by jurisdiction, phones and phone accessories might have the same tax in one jurisdiction and different taxes in another.
- Some US states tax extended warranties, others don’t tax them, and still others have conditions for when they are taxed and when they are not taxed.
- Retailers that sell goods online must calculate taxes on those goods based on their customers’ locations rather than the locations of their stores.
Currently, many telecom retailers are stuck configuring their tax rates for each location manually, which is a painstaking and time-consuming process, that can be prone to errors that can open businesses up to serious repercussions. Overcharging sales tax is not only unethical but also illegal, especially if the excess amount remains with the business upon remittance. And correcting overcharges poses considerable challenges.
Conversely, undercharging sales tax places businesses in a precarious position, as they remain responsible for collecting and remitting the correct tax amount. Despite that the tax is paid by customers, businesses are ultimately accountable for any discrepancies, leading to financial losses that directly impact the bottom line.
Again, this complexity can be solved with a solution that calculates the correct sales tax rate at the point of sale and instantly applies it to the invoice.
Tax remittance is both time-consuming and high risk, especially when managing multiple locations.
As if all that wasn’t enough to keep track of, the process of remitting sales tax is just as variable as all the rest, with different jurisdictions imposing varying deadlines and requirements for how businesses remit sales tax:
- Different tax jurisdictions often have different deadlines for return submissions, and return dates aren’t always the same as payment dates.
- Some tax jurisdictions still require physical tax submissions! And those that don’t require them can have different submission deadlines for electronic versus paper returns.
- Filing deadlines can vary by sales volume — businesses with lower sales volume might only be required to file annually, while businesses with high volume could be required to remit monthly above a certain threshold.
Just staying on top of timelines and requirements for filing can be a challenge. But today’s technology can simplify the preparation of preparing and filing returns, and offer retailers the ability to report on and remit taxes.
Tax regulations need to be monitored to ensure compliance with changing regulations. Failure to comply can have costly consequences.
Tax regulations are continually changing, which leaves retailers who are stuck with tax systems that must be manually configured on the hook for staying up to date with changing jurisdictional regulations.
Failure to comply with tax regulations can often have severe legal consequences — ranging from tax bills for the shortfall to regulatory audits. In some cases, auditors may conduct sample audits, scrutinizing a defined period to extrapolate potential discrepancies — an approach that assumes consistent sales collection practices, but can have a compounding effect on even a single instance of under-collection. Using outdated tax rate information or misinterpreting jurisdictional regulations can also lead to regulatory scrutiny and audits.
In the case of egregious violation of tax regulations, regulators can be empowered to impose additional interest, fines, and penalties – up to the revocation of permits or criminal penalties for individuals deemed responsible.
Using an integrated tax management solution solves for this challenge by monitoring and updating systems with all pertinent regulatory changes to keep retailers in compliance.
Tax Management, powered by Avalara, solves all these tax challenges and burdens.
Fortunately, the labyrinth of sales tax regulations and challenges identified above can be solved with iQmetrix’s Tax Management solution, powered by our partner Avalara, which is now integrated seamlessly into iQmetrix’s point of sale and retail management solutions.
Whether you’re in the US or Canada, Tax Management enables telecom retailers to eliminate risk and guesswork by automatically identifying tax obligations, calculating correct sales tax rates, managing exemption certificates, and preparing and filing returns.
What’s more, to celebrate our new integration, Avalara is offering iQmetrix clients a free sales tax assessment worth $4,500. The assessment includes:
- Guided nexus questionnaire
- In-depth analysis of economic and physical nexus tax obligations
- One-on-one consultation with an Avalara sales tax professional
