Sales and Use Tax Compliance for Dummies Stacy

Sales and Use Tax Compliance for Dummies Stacy Dose Strategic Alliance Manager, National Accounts, Avalara

Pop Quiz

Taxable or Exempt? Which of the following items are taxable and which are exempt? Bagels in New York Candy bars in Indiana • Sliced: Taxable • Twix: Exempt • Whole: Exempt • Butterfinger: Taxable • Kit Kat: Exempt Takeout beverages in Colorado • Straws: Taxable • Cups and lids: Exempt 3

Agenda Challenges of Compliance How Automation Helps Ebook: Sales & Use Tax Compliance for Dummies 4

Challenges of Compliance

The state of our states While the U. S. economy grows, state sales tax collection lags Risk States are increasing enforcement (e. g. audits) ©Avalara. Confidential and proprietary. 6

States rely on sales tax revenue Total state government tax collections Selective sales taxes 16. 6% General sales and gross receipts taxes 30. 5% ©Avalara. Confidential and proprietary. Sales tax makes up 47% of total state revenue 7

States are losing Online sales hurt state revenue $24 B from uncollected tax on ecommerce sales Source: US Census Bureau: Finance – Survey of State Government Tax Collections at www. census. gov/govs/statetax National Retail Federation - https: //nrf. com/blog/nrf-ceo-calls-congress-address-sales-tax-fairness-new-campaign-launches

Rates ©Avalara. Confidential and proprietary. 8

Tax calculations Nexus 1 6 Product taxability 2 Jurisdiction assignment ©Avalara. Confidential and proprietary. Audit readiness 5 State and local tax prep and filing 3 4 Exemption certificates 8

The Nexus Challenge Understanding nexus › “Nexus” describes the connection between a state and a business › Having nexus allows a state to compel an out-of-state company to register and collect sales or use tax › The out-of-state company must have “physical presence” – but that definition is changing 11

The nexus challenge Owned / leased real property Field sales / service staff Inventory location Multistate locations Maintenance / service / repairs Direct / online sales Licenses / royalties / fees Trade shows Manufacturer’s reps Investors / board meetings Marketing / web advertising Hosted data centers Affiliates Economic nexus ©Avalara. Confidential and proprietary. 11

NEXUS-CREATING ACTIVITIES A GROWING LIST Affiliates Maintenance / service / repairs Trade shows Owned / leased real property Commissions to resellers Hosted data centers Investors / board meetings Field sales / service staff Marketing / web advertising Licenses / royalties / fees Drop shipments Direct / online sales Multistate locations Inventory 13

The Nexus Challenge: Use Tax The forgotten tax Seller’s Use Tax › Interstate transaction where the seller is compelled to collect tax because of nexus Use Tax › Purchases of equipment and supplies from out-of-state for use in business › Withdrawals of inventory for taxable use such as R&D, promotional materials, warranty repairs, etc. 14

The product taxability challenge Product definitions vary by jurisdiction Complex product-based tax exemptions and special rates Taxability may vary based on how the product is used ©Avalara. Confidential and proprietary. Tree trimming in California Snow removal in Midwest Taxable With lights Taxable Ohio Exempt Labor only Exempt Illinois Takeout in Colorado Bagels in New York Taxable Straws, cup lids Taxable Sliced Exempt Cups Donuts in Texas Taxable <5 Exempt >6 Exempt Whole Candy bars in Indiana Taxable Butterfinger Exempt Kit. Kat, Twix 1, 800 RULES DIFFERENT 13

The jurisdiction assignment challenge 16, 000+ U. S. jurisdictions 150 M+ mailing addresses 11, 000+ jurisdictional rules 35, 000+ sales / use / rental tax rates ~30 M product / service exemptions 750, 000 buyer / seller exemptions ©Avalara. Confidential and proprietary. 14

The jurisdiction assignment challenge 16, 000+ U. S. jurisdictions Boundaries may overlap ZIP code-based jurisdiction assignment is inaccurate 80111 taxes 2. 9% . 25% Colorado Arapahoe State 7. 85% County ©Avalara. Confidential and proprietary. 1. 0% Douglas County 4. 35% 3. 5% Englewood City 4. 35% 3. 0% Greenwood Village City 6. 85% 2. 5% Centennial City 7. 72% 1. 0% . 10% Football Regional District Transport 7. 35% District . 10% Science and Cultural 5. 10% District 15

Mental Break - True or False? In Massachusetts, a clothing item costing up to $175 is exempt from sales tax. However, any item costing $175. 01 and above is subject to the state sales tax. © Avalara CONFIDENTIAL & PROPRIETARY True! 18

How Automation Helps

Photo from Paul Skorupskas on Unsplash How can sales tax automation help your business? Mitigate risk by increasing accuracy Improve efficiency with time saved and increased profitability 20

69% of accounting and finance professionals agree understanding sales and use tax is one of the most confusing parts of the job Source: Wakefield Research Report: The Executive’s Guide to Sales Tax Risk, 2015 21

Avalara’s reason for being 42% 48% 69% would rather get a root canal than go through a sales tax audit think a Rubik’s Cube would be easier to master than sales and use tax laws think acing the SATs is easier to accomplish than mastering sales and use tax regulations say that understanding sales tax compliance is one of the most confusing aspects of the accounting team’s job Source: Wakefield Research 2015 22

Why do companies outsource tax compliance? Auditor is NOT LIKELY to find mistakes 25% 75% Auditor is LIKELY to find mistakes ** Yearly employee costs of compliance* $67, 000—$400, 000 *Aberdeen Research, The Costs of Compliance **Wakefield Research, Sales and Use Tax Compliance, 2017 ©Avalara. Confidential and proprietary. 23

Sales tax audits are not fun 56% Costs spent preparing of • Time companies have found the cost of an and supporting average sales tax audit to be over $50, 000 • Back tax payments • Penalties and interest 2017 ©Avalara. Confidential and proprietary. 25

Top-performing organizations 72% MORE LIKELY to leverage realtime updates to tax regulatory changes 3. 3 x AS LIKELY to have automated workflows for tax preparation, filing, and remittance / recovery Source: Aberdeen Group 2015 ©Avalara. Confidential and proprietary. 25

“Any efforts spent on sales and use tax compliance and related activities are non-revenue generating. ” JENNIFER MESIANO IT DIRECTOR, WALTON SIGNAGE

Addressing the challenges Avalara Sales Tax Suite Nexus Product taxability 1 6 Jurisdiction assignment Exemption certificates State and local tax prep and filing Audit readiness ©Avalara. Confidential and proprietary. 2 5 Find jurisdictions Add Automate Easily Outsource Uses jurisdictions built-in access certificate filing rules, tax and data using full address, with management and remittance ongoing documents one updates click not ZIP codes 3 4 8

Avalara Sales Tax Suite End-to-end sales tax automation Cert. Capture Ava. Tax exemption management Request Certificates Your customers ©Avalara. Confidential and proprietary. Returns tax calculation Customer info Transaction info Taxes Your systems ERP, ecommerce, POS, billing managed filing Research tax rates, boundaries, and rules Research filing rules, forms Returns, remittances Government 27

Ebook: Sales & Use Tax Compliance for Dummies

Questions? Contact us for more information Stacy Dose (612) 741 -2427 Stacy. Dose@Avalara. com 30