Balancing Act

According to a new study from sales tax software vendor Sabrix, 95 percent of the companies surveyed underestimate their sales tax liability.

...

The survey also suggests that companies do not accurately assess their reach and sales tax liability across state lines.

As state taxing authorities are challenged to drum up more revenue to balance state budgets, many states are becoming more aggressive with their auditing initiatives of companies that do business across state lines.

The Sabrix study also found that 85 percent of the surveyed companies had underestimated the number of states they needed to register in. The data suggests that midsized companies with customers all over the country were most vulnerable to improperly assessing their multi-state sales tax liability. These same companies tend to assume the most significant risk of audit exposure. On the other hand, smaller businesses appear to have a smaller non-compliance risk. It is thought that this is due to the fact that these companies typically do business in only a few states. So while they still tend to underestimate their tax liability, their inherent risk is lower.

According to Sabrix, the company that conducted the survey; issues such as independent contractors, services and trade shows were typically overlooked by the companies who participated in the study. In many states, a nexus may be established by having an agent acting on behalf of the company. Any service performed in a particular state can create a nexus. This nexus exists regardless if it is a one time event or multiple events. Additionally, any trade show activity, even a single day, may establish nexus even if the company does not sell anything and the visit is only for the purposes of distributing information.

Because it can be difficult for small business owners to keep track of their sales tax obligations, we recommend that business owners talk with their business advisor to make sure that their business is in compliance. As always, we are always available should you have any questions regarding your particular situation. You can contact us at (203) 404-3974 or send me an email at jrosen@rospro.com.

The survey was conducted by Sabrix in the third quarter. Companies surveyed ranged in size between $3 million to $170 million in revenue and participated in a large cross section of industries.