How to Streamline Compliance with Complex Sales Tax Regulations
Staying compliant with updated 2020 sales tax rules and regulations is an absolute must for all business owners in the home and commercial services industry.
James Maughan, the partner development manager at Avalara, is a sales tax compliance expert and the point person for all ServiceTitan customers who want to get more tax compliant. He has over 20 years of finance experience and works exclusively with field service providers at Avalara, a leading software company for automated tax compliance.
Avalara’s tax compliance software integrates into major CRM, ERP, and other invoicing systems, including ServiceTitan’s cloud-based platform.
Tax compliance is such a hefty undertaking that, even for big businesses, it’s easier to outsource than it is to manage in-house.
“The amount of resources that it takes to actually have an accurate and up to date tax engine, it's overwhelming, so that gets outsourced to vendors like Avalara,” Maughan said. “We processed over 2 million sales tax returns last year.”
When it comes to tax compliance, it’s always better safe than sorry.
Here are the key takeaways from Maughan’s webinar, hosted by ServiceTitan, on staying compliant with sales tax rules and regulations.
2018 Wayfair Supreme Court ruling on sales tax
In 2018, the United States Supreme Court ruled in favor of the state of South Dakota in the case of South Dakota v. Wayfair, Inc.
“We had a Supreme Court ruling that changed the landscape for everyone,” Maughan said. “Wayfair, the furniture company, does not have a physical presence in most states and was delivering millions of dollars worth of furniture as an internet retailer without using its company trucks or having warehouses all over the place. And South Dakota said, 'Wait a minute, we're not getting any tax revenue even though you're selling so much in our state, we want a piece of this.’"
According to Maughan, the Supreme Court ruling, “opened up the floodgates and empowered individual states to set unique rules and laws about what their sales tax rules are, what their filing calendars are, and they created onerous demands on businesses that many companies can no longer keep up with, particularly if you're crossing state lines.”
This case spawned a wave of state-imposed economic nexus laws across the country.
Economic nexus vs. physical nexus
Economic nexus meant that a physical presence in a state was no longer the only requirement for sales tax collection by sellers.
“So they established economic nexus,” Maughan explained. “Physical nexus, everyone pretty much understands. And even though we don't love taxes, we can agree with the fact that I have a warehouse, I have employees in California so I have to register and remit in California based on California rules.”
The chaos of each state having its own laws concerning economic nexus is exacerbated by the ever-evolving role interstate commerce is playing in all industries.
Since the Wayfair ruling, 43 out of the 45 states with sales tax have adopted some form of economic nexus.
Consumer use tax
Arguably the most confusing part of the sales tax rules and regulations for many sellers to navigate is the consumer use tax.
“Let's say you're buying materials tax-free, which in most cases businesses will be doing,” Maughan said. “You buy it tax-free, you then use them on the site as part of the job. And you don't charge the customer tax, maybe it's a warranty or maybe it's just part of a lump sum invoicing. You bought them tax-free, you consume them, they're gone, but no one has paid the state tax on that, that's consumer use. Some businesses have a very small exposure to consumer use, some businesses have a very large complex and confusing exposure to consumer use.”
Promotional giveaways and consumer use tax
So who pays the sales tax on promotional giveaway items and products/services that are bundled into pricing as part of a job?
“There's a story of a large consumer coffee company whose employees were getting free coffee, which makes sense,” Maughan explained. “A couple of cups of coffee a day, the cups themselves, the sugar, the straws, whatever it is when you do that over thousands of locations with thousands of employees that adds up pretty quickly. An auditor found that that coffee company was not self-assessing use tax and it was death by a thousand cuts. You had a couple of pennies here, a couple of pennies there, but it ended up to be hundreds of thousands of instances of this happening. I think that on a much smaller scale, it affects field service providers any time that you're using gloves or materials or giveaways as part of the job.”
Because there are so many nuances to tax code and it becomes exponentially more confusing once state lines are crossed (even electronically, such as with collecting leads), Maughan highly recommends utilizing compliance software to take the guesswork out of interstate compliance.
According to Maughan, with a platform such as ServiceTitan, the compliance software “lets you run your business and not have your sales reps become tax pros.”
Tax laws vary by state
The individual states each have their own rules and regulations regarding what is considered economic and physical nexus.
“For most states, the line in the sand is $100,000 of gross revenues or 200 individual transactions,” Maughan explained. “Kansas is the most onerous example. Kansas is trying to tax if you do $1 or one transaction in their state, you need to register and remit according to Kansas rules. Now, it's not yet been found legally enforceable, but that's where they're trying to go with this.”
Economic thresholds vary by state
California and Texas: $500,000 in sales
Kansas: all remote sales
North Dakota: $100,000 in sales (new threshold effective Jan. 1, 2020)
Connecticut: $250,000 in sales and 200+ retail sales
Georgia: $100,000 in sales or 200+ retail sales (new threshold effective Jan. 1, 2020)
Alaska: $250,000 in sales
5 States With No State Sales Tax
These interstate tax compliance issues are complicated, to say the least. Even small projects or aspects of a business can be affected by tax compliance.
“If you're just physically crossing over state lines, or if you have an employee that resides in another state and has to travel to a different state to do a job, that generally brings up economic nexus or physical nexus concerns,” Maughan said.
Physical nexus in the field services industry
Nexus is the connection between a business and a taxing authority that requires the business to submit itself to the jurisdiction of that authority.
Types of nexus for remote sellers are:
Nexus potentially applies to many aspects of the home and commercial services industry.
If you have property, if you have inventory in another state, if you're getting leads from out of state, Maughan said, these are all areas that you’ll want to evaluate to see if they fall under the nexus tax laws for the states involved.
Even though any of the categories of nexus could apply, the most common application of nexus for the field services industries is typically physical nexus.
“It's mostly if you're crossing state lines, you have to think about what you have to do in that remote state, and there may be something,” Maughan said.
States rely on sales tax revenue
States are heavily reliant upon sales tax for revenue generation. Total state government tax collections show that sales tax makes up 47 percent of total state revenue.
With so much of each state’s infrastructure and economy dependent upon state sales taxes, Maughan predicts that sales tax collection methods will become highly proficient in the future.
Artificial intelligence and other technologies are making the process of auditing a business faster and easier for governments.
Real-time point of sale remittance is one way Maughan says governments are looking to tax a product or service as soon as a transaction takes place.
“In other words, if you would make a transaction and as that transaction commits, you would get your money and you would have to immediately send money to the state as part of that transaction, in real-time,” Maughan said. “We're not there yet, but that's what they're trying in a couple of other countries outside of the US. They're trying to get real-time remittance.”
Market dynamics that increase tax compliance complexity
The complexities of tax compliance are seemingly endless. With so many varying factors to account for, it’s a lot to manage.
“We're talking about changing regulations and managing for growth,” Maughan said. “If you have a family business that's been around for a while with very little turnover, the question is who's trained for these new rules? If you have a business that is looking to get taken over, I know that there's a roll-up strategy for private equity that is coming into this space and buying numerous operators in a state and kind of rolling them up. That's happening, so if you want to be ready for M&A it certainly helps if your books are in shape.
“But if you have people coming or leaving, if you're managing change, and if you're planning on expansion or growth, as you cross into other states, the amount of work will grow exponentially.”
Tax compliance complexity: Market dynamics to consider
There are numerous market dynamics that are areas of consideration for tax professionals when processing payments and invoices. It’s a lot to keep track of, so utilizing software to minimize the time spent tracking regulatory updates isn’t just a time-saver, it could save you some headaches in the event of an audit.
The market dynamics include:
Opening new markets
Digitization of accounting
Artificial Intelligence and machine learning
Self-service and zero touch
Ever-changing import tax rules and rates
Product classification complexity
B2C landed cost
Customs duty and import tax
Live reporting requirements
Complex beverage alcohol regulations
Complex telecom regulations
Economic nexus (Wayfair)
Making tax digital
With automated auditing capabilities becoming more widespread, Maughan predicts the nexus thresholds for sales minimums will be lowered in efforts by states to increase sales tax revenue.
Compliance goals met efficiently
The days of spending 20 hours to do one or two monthly sales tax returns are over.
Compliance is the main objective of any tax services software. But having to go through multiple programs or time-consuming processes can negate some of the progress made by automating.
“Our primary goal is compliance,” Maughan said. “However, we want to marry that with as many efficiency gains as we can possibly capture so that your staff turns into verifiers as opposed to producers. Your salesmen are selling and your repairmen are repairing as opposed to becoming tax pros.”
ServiceTitan and Avalara tax compliance suite solutions
ServiceTitan utilizes Avalara tax compliance software solutions to help field service industry professionals stay up to date on regulatory changes for calculating complex sales tax for applicable products or services. The tax compliance suite also pinpoints all exemptions (even from other platforms) and has software solutions for tax filing assistance.
AvaTax sales tax calculator
The Avalara sales tax solution is centered around the AvaTax calculator, which uses transaction information to calculate applicable taxes for products and services. Those completed transactions are shared across your ERP, POS, e-commerce, and other billing systems.
Keeping up to date with tax codes
“We maintain over 3,000 tax codes and a few hundred of them are dedicated to the construction and field service industry, broadly speaking,” Maughan explained. “As you map your products and services from ServiceTitan or map them into AvaTax, that identifies what you're selling and where you're selling it. We’ll maintain the taxability on the back end of that.”
CertCapture exemption management tool
CertCapture is an exemption certificate and document management software. This software is especially helpful if you work with nonprofit or other exempt businesses.
“If you're only dealing with a handful of nonprofits or exempt entities, you may be able to manage them offline,” Maughan said. “However, if you've ever been pulled into an audit and been asked for exemption certificates and not be able to produce them, that's where it gets a little hairy. You are at risk of paying taxes that you've never even collected.”
Avalara returns processing
Working with multiple invoicing systems every month can be a time-consuming hassle.
“We'll take all the transactions, provide one clearinghouse so that we can submit returns on your behalf,” Maughan explained. “With returns, a lot of people could decide maybe the 18th or the 19th of the month and they just cram. Whether it's one state or multiple states, you have to sometimes go to different systems, patch together all these different numbers, all these different liabilities, put them on the forums, go to the gateway, sign in, put in your numbers, put in your routing numbers, send them their money, and then do it state-by-state.”
There is a much easier way to do this than the monthly invoicing wild goose chase.
“Avalara's returns process works because we're capturing all of your transactions, we will have the returns prepared for you,” Maughan said. “We want to turn staff into someone who verifies, not sits there and produces these actual returns.”
Jurisdiction Assignment: Navigating overlapping sales and tax jurisdictions
In the United States alone there are more than 12,000 overlapping sales and use tax jurisdictions, according to Maughan. The variances in tax rates can fluctuate by extreme amounts from one city block to the next in some instances. Maughan and his team identified a 4.75 percent tax rate and just one block away, a 9.25 percent tax rate.
“The taxability is not based on zip codes,” Maughan explained. “Zip codes are for mailmen. Taxing jurisdictions are what auditors care about. Auditors do not consider zip codes to be reliable enough, so they use taxing jurisdictions.”
Taxing jurisdictions are complex to an extreme.
“The airport in Colorado has three taxing jurisdictions in it. So you could buy a bottle of water and you're going to have a different tax rate in three different places in the same building,” Maughan said. "It's absurd, but it's a real thing.”
Jurisdiction assignment software
The steps to jurisdiction assignment are involved to ensure that the proper jurisdiction is assigned the first time.
AvaTax validates/corrects address: Because of the importance of classifying a jurisdiction assignment properly, the first step in the AvaTax process is to validate that the address of the client is correct.
Applies sourcing rules: It considers origin, destination, and hybrid options for sales tax.
Assigns applicable jurisdiction: The software makes sure your jurisdiction compliance is accurate, this is typically freight related.
Applies tax rules and regulations: Knowing the codes is one thing, inputting that information into applicable invoicing systems is another automated step that Avalara’s processing software addresses.
Checks exemption status: Know if you’re partnering with an exempt business or entity before you start processing paperwork. Load an actual certificate into the cloud and tag your customers as exempt for future transactions.
Identifies product taxability: Avalara’s platform can identify which products and services you’re offering are taxable.
Verifies tax holiday status: The platform confirms whether your products or services are covered under a tax holiday rule.
Stores information for future remittance: Keep all of your invoices in one easy-to-access place.
All of these areas demand an eye for detail, but according to Maughan, “the most difficult part for the construction industry is the actual product taxability. Are you attaching something to real property or are you attaching something to a tangible personal property? Is the service exempt? Is it not exempt? Is it partially taxable? How are you handling warranties? What if you sell a warranty at the time of the sale or what if you sell it a couple months later? What if you do an extended warranty? What if you're doing lump sum invoicing versus itemized?”
Asking a field rep to figure out all of these complex tax codes on the spot to provide an accurate customer quote is not a practical request.
“For product taxability, we go line by line as you populate an invoice and we maintain all of these rules for each line of that invoice so that your salesmen or your field reps just have to populate the invoice,” Maughan said. “They don't necessarily have to know all the rules and taxability particularly of services where it gets most complex in a state, let alone if you're crossing over state lines and just doing a couple of random jobs a year in another state.”
Consumer Use Tax: An in-depth review
John Sallese provides more insight into the complexities of consumer use tax. It seems like a straightforward tax, but there are of course the customary contradictions that come with any tax code. Sallese explains the nuances of this often misunderstood tax.
“Consumer use tax is the tax that is owed by the buyer on a purchase when taxes weren't charged correctly on the invoice that you're getting from your vendor,” Sallese explained. “Sounds easy enough, but what does it mean? As long as the seller is charging you the correct tax amount, no worries, right? If you've got the right tax amount and you're paying it, no worries. The problem though comes in when you're actually buying something and the tax isn't correct.”
When a vendor doesn’t charge tax properly
Who is responsible if a vendor you work with doesn’t properly assess taxes at the time of the transaction? The vendor is off the hook in this scenario according to Sallese.
“The buyers are responsible to make sure taxes are paid on that,” he said. “And a lot of companies still don't charge tax and so when you get that stuff in, you need to make sure you're self-assessing tax correctly on those purchases because, at the end of the day, you're going to owe it.”
Reselling and promotional giveaways on untaxed products
If you made a purchase with the original intent of using it for inventory and it is later used for other purposes or resold, you will owe taxes on that original inventory purchase.
“Those (applicable products) were bought tax-free, so how you're actually using them is going to affect the taxability,” Sallese explained.
Jurisdiction purchase and use compliance
“Items purchased in one jurisdiction but used in another—this happens a lot with companies that maybe you might have four or five offices—you centrally purchased maybe all of the laptops your employees use into one state, you configure and set them up and then you as a company send them out,” Sallese said. “Sales reps are usually the ones that this falls into.
“Checking to make sure you don't owe consumer use tax, as you can probably guess, is a somewhat resource intensive issue.”
Proper compliance software can improve processing time immensely.
Alavara consumer use tax tool
In the home and commercial services industry, working with vendors and calculating taxability across state lines can be a time-consuming and confusing undertaking.
“You probably buy a lot of parts and materials, you probably put them in inventory, and then you probably use them in either performing a service somewhere or an outright sale. And depending on how you're using it can affect taxability,” Sallese explained.
“The scenario I use is if you're pulling parts out of inventory to perform a service and the service isn't taxable in that particular state. If the service isn't taxable, usually parts used in performing that service are.”
According to Sallese, auditors know use tax and exemptions are low-hanging fruit when it comes to audit red flags. They’re easy to spot and yield high returns when they start to dig for inconsistencies.
“It only takes one or two vendors that you consistently buy from on a regular basis to not be charging correctly, to affect your exposure,” Sallese said.
How to calculate Consumer Use Tax
“We've built a tool that can take in AP files or data information from different sources,” Sallese explained. “It brings it into our system here. We can actually apply tax rules to those lines coming in, we can check the tax that was actually on the invoice. And we can tell you if the tax was right, if you need to self assess the difference, or if you just need to ignore the invoice altogether.
“But it gives a centralized tool that does it all. There's an audit log it creates, but it creates a clear path of the invoices that you've decided to either self-assess or ignore.”
The new tool provides reporting and verifies when self-assessing tax is required as well.
The main takeaway that field service providers should keep in mind is that sales tax compliance is complex and can get you in hot water later if your books aren’t in order.
“If you're expecting expansion, acquisition, or employee turnover, automation can fill the gaps and keep your business running smoothly during that transition,” Maughan said.
ServiceTitan is a comprehensive home and commercial services business software solution built specifically to help companies streamline their operations, boost revenue, and achieve growth. Our award-winning, cloud-based platform is trusted by more than 100,000+ contractors across the country.
Ready to learn more about what ServiceTitan can do for your business? Contact our team to schedule a demo today.