How sales tax management services handle audits

July 8, 2013

Congress is currently considering legislation to allow states to require online retailers to collect sales taxes. The bill that was passed by the Senate in May, the Marketplace Fairness Act, has raised concerns about how it could affect the way businesses are audited.

At TaxCloud, we handle not only sales tax calculation and collection but also filing and audits for many of our merchants. While we don’t know exactly what future legislation may say about audits, here’s what our experience dealing with audits has been like.

First, a little background: The 24 states that have designated us a Certified Service Provider (CSP) have agreed not to hold our merchants liable for any tax calculation errors, and in the event of an audit, these states deal first and primarily with us, not the business itself. So how does this work?

When one of our merchants is audited, the state begins by contacting us. We act as the intermediary between the state and the merchant. The state lets us know that it will be reviewing the merchant’s transactions and conducting an audit beginning on a particular date, and we in turn notify the seller.

The merchant doesn’t need to provide any additional information at this point, as long as we have complete transaction data. If there is transaction data that we don’t have, the merchant needs to supply it.

During the audit, the state sends any information or document requests directly to us. Occasionally we may need the seller’s help to respond. For instance, if an item was classified as tax-exempt but it’s not clear in the transaction records exactly what the item is, we’d ask the seller to provide a description of the item. The state contacts the merchant directly only if there is evidence of fraud.

If future legislation follows this pattern for audits, it’s good news for businesses: It means that states will go to sales tax management services for data that businesses have traditionally had to supply, so businesses won’t be faced with hosting an audit.

The mechanics of online sales tax

March 22, 2011

As the argument that online retailers should collect sales tax has been gaining steam, some people have begun wondering about the mechanics of online sales tax collection. Exactly how would it work? What would an online retailer—especially one smaller than Amazon and big-box retailers—need to do to collect sales tax for all 13,000 tax jurisdictions in the country?

The Streamlined Sales Tax initiative has provided the first part of the answer. It’s worked to reduce the costs and complexities of collecting sales tax for retailers and states alike, particularly for retailers that collect sales tax for multiple states. It does this by creating standard tax categories and definitions that every Streamlined member state must adopt—so that, for instance, a candy apple would be in the tax category “candy” in every member state, instead of being considered candy in one state and fruit in another. The actual tax rate isn’t affected—each state still decides on its own the applicable rate and whether items are taxable or exempt—but the standardization and simplification Streamlined provides means that retailers have a much easier time collecting sales tax for multiple states.

But the simplification that Streamlined provides is only part of the answer. The other part of the answer is technology, which is essential to keep track of the 13,000+ tax codes in the country. Technology providers have stepped in with software and services that provide various levels of sales tax management.

Recognizing the key role technology (and, therefore, technology providers) plays in collecting sales tax online, the Streamlined Sales Tax Governing Board established a certification process whereby technology providers have their systems tested and verified by each of the Streamlined member states. Upon successful completion of this process, these companies earn the title of “Certified Service Provider” (CSP) and are authorized to perform all of the sales tax functions for companies. Due to the logistical complexity of the certification process (it takes about a year of coordinated efforts among all member states to certify a CSP), companies may apply to become CSPs only during a brief application period every other year.

FedTax was designated a CSP on July 1, 2010. We are currently the only CSP that is providing its services at absolutely no cost to merchants.

As a Certified Service Provider, we handle every aspect of sales tax calculation, collection, and remittance for our clients. Our TaxCloud service calculates, in real time, the sales tax due on any transaction. It determines whether an item is tax-exempt, manages entity exemption certificates, and automatically integrates changes and updates to tax codes, rates, and jurisdictions—for every jurisdiction in the nation. Finally, TaxCloud keeps track of all collected sales taxes to be remitted by retailers , generates and files all state-by-state sales tax returns, and remits tax payments to all applicable jurisdictions.

What’s more, TaxCloud is extremely easy for anyone to use. Most retailers are able to set up TaxCloud in less than 20 minutes, and it can be integrated into virtually any accounting or e-commerce shopping cart system.

Because we are a CSP, we take full responsibility for any state audit requests on behalf of our TaxCloud clients. In addition, as a CSP we are compensated by SSUTA-participating states, so we can provide TaxCloud to retailers for free. In short, we’re offering a service that handles all sales tax management obligations for retailers at absolutely no cost.

If you’d like to learn more about TaxCloud, check it out here.