© Avalara

Katherine Cxypoliski

Strategic Alliance ManagerAvalara

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Sales Tax Challenges for Today and Tomorrow

Making sales tax less taxing.

Agenda

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• What’s the big picture? – why sales tax matters• Got Nexus? • Product Taxability • The Tax Man: Audit planning, preparation and

avoidance• The problem with services• Take a load off – How to automate the process

Making sales tax less taxing.

Why sales tax matters

When general sales tax and selective sales tax are

combined, sales tax makes up 47% of total state

revenue.

Source: US Census Bureau, 2012 Census of Governments: Finance – Survey of State Government Tax Collections at www.census.gov/govs/statetax

Total State Government Tax Collections by Category

Other taxes 3.9%

Corporation net income taxes 5.3%

Total license taxes 6.8%

Total selective sales taxes 16.6%

General sales and gross receipts taxes 30.5%

Property taxes 1.6%

Individual income taxes 35.3%

Making sales tax less taxing.

• 150+ million mailing addresses

• 12,000+ jurisdictional rules

• 35,000+ sales / use / rental tax rates

• ~ 30 M product / service exemptions

• 750,000+ buyer / seller exemptions

Sales tax compliance challenges

Making sales tax less taxing. 5

What is Nexus – and why you should care!

What is nexus The right questions to ask Nexus rules and Amazon laws apply

to everyone

Making sales tax less taxing.

Nexus-creating activities: a growing list Multi-state locations

Maintenance/service/repairs

Own/lease real property

Hosted DataCenters

Field sales/service staff

Charge Licenses/royalty/fees

Direct and/or online sales

Maintains inventory

Affiliates

Tradeshows

Commissions to resellers (1099s)

Investors/board members

Marketing/Web advertising

Drop shipments

Making sales tax less taxing.

States finding more sales tax revenueby broadening definitions of nexus Remote sellers can no longer assume that Quill v. North Dakota

means they don’t have to collect sales tax

Nexus-creating activities (examples):D Independent agentsD Remote sales forceD Affiliate Nexus D Trade show participation

“Amazon Laws”D Cyber Monday, 2013: SCOTUS leaves NY click-through affiliate law in placeD 11 States have already passed Amazon Laws

Making sales tax less taxing.

Nexus Rules and Amazon Laws Apply to Everyone

Making sales tax less taxing. 9

Jurisdiction Assignment

Close isn’t close enough The problem with zip codes

Making sales tax less taxing.

Tax Rates are not tied to zip code

Taxing jurisdictions don’t always follow ZIP Codes! Individual counties and municipalities levy sales taxes in

addition to state rates Tax rates can vary significantly within a ZIP code ZIP codes

D Are a blunt instrument for determining sales tax rates and boundaries

D Will almost certainly lead to calculation mistakes

D Can lull you into a false sense of security

Making sales tax less taxing.

Tax Rates are not tied to zip code (cont.)Don’t rely on zip codes!

Ex. Greenwood Village, CO has one ZIP code, but four different sales tax rates!

Geolocation technology determines the exact point of

taxable transaction.

Making sales tax less taxing. 12

Product taxability

Why product taxability is so confusing Zip codes/product taxability issues

Making sales tax less taxing.

Product taxability issues

Rules and rates vary between states

The following industries have varying taxability rulesD Software / hardware D Digital goods D ServicesD Medical device / equipment D Food / beverage D Clothing / apparelD School-related productsD Dietary supplements D And many other industries / products

Making sales tax less taxing.

Product Taxability is (always) changing

Taxable

Exempt

Taxable

Exempt

Candy with or without flour can determine if it is taxable

Non-carbonated with supplement label is taxable

Non-carbonated with nutritional label is exempt

Making sales tax less taxing. 15

The Tax Man: Audit planning, preparation, and avoidance

Keeping the auditors’ pockets empty Checklist reducing audit risk

Making sales tax less taxing.

States finding more sales tax revenueby hiring auditors California announces hiring 100 auditors over the next

three years

Idaho hires 48 auditors that stay on as full time staff

Making sales tax less taxing.

Audit Trails are mandatory (cont.)

How to reduce audit risk

Do a nexus study Stay up-to-date with rate,

rule, and boundary changes Report consumers’ use tax Be compliant from day one,

especially new businesses Automate with technology

An understanding of your filing requirements

Calculations that are rooftop accurate

Product taxability coverage Detailed sales records A process for managing

exemption certificates

You should: Make sure you have:

Making sales tax less taxing. 18

The problem with services

Why they’re auditor red flags Know what’s exempt and what isn’t Who carries the burden of proof:

consumer or seller?

Making sales tax less taxing.

Services are taxable…but not always

Know the difference between• Tangible Personal Property• Real Property Services• Professional Services

Hint! States often define taxable services differently.

Making sales tax less taxing. 20

Bundled Transactions: Defined

• A “Bundled transaction” is a sale of multiple sales tax objects with a single sales price. The sale may include both taxable and nontaxable objects.

• The vendor charges a customer one sales price for all objects sold instead of separately charging for each individual object.

CONFIDENTIAL & PROPRIETARY |

Making sales tax less taxing. 21

Take a load off:How to automate the process

Steps before you automate Offloading manual steps How automation works

Making sales tax less taxing.

Saves time

Increases accuracy

Mitigates risk

Improves efficiency

Increases profitability

Automating the Process

No more researching rates or building and

maintaining tax tables

Making sales tax less taxing.(c) 2015 Tax Technology Group, Inc.

Before you automate. . .

• Estimate Tax “Leakage”– Sales tax audit assessments– Interest & penalties– Time value of money on use tax assessments / overpayments

(don’t include use tax itself)– Sales & use tax reserves

• Determine Tax Process Costs - Estimate of internal resource hours spent managing exemption certificates, tax filings, audits, maintaining taxability matrices & rates, etc.

• Cash flow considerations (impact to AR collections due to customers delaying invoice payments due to sales tax issues)

Automating the Process

Making sales tax less taxing.

What gets automated

Calculate, report, return, remitD Apply nexus rulesD Apply client exemption rulesD Derive the correct set of rates, validate the addressD Derive (find) the local tax ratesD Apply product taxability rules (product exemptions and exceptions)D Apply SITUS (jurisdiction sourcing rules)

Taxing jurisdictions ≠ zip code boundaries

Automating the Process

Making sales tax less taxing.

Sales & Use Tax Automation – A One Stop Shop Experience

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Accurately calculate tax in more than 12,000 taxing jurisdictions

File and remit returns accurately and on time,

every time

Create, validate and store exemption/reseller certificates in the cloud

www.avalara.com877-780-4848