One of the most intricate hurdles for businesses operating on a global scale is navigating local compliance, especially when it comes to sales taxes. The complexities of tax collecting requirements are magnified when dealing with diverse regulation systems such as the U.S. Sales and Use Tax in contrast to the Value Added Tax (VAT) prevalent in other parts of the world. In this blog post, we will examine the complexities and potential pitfalls faced by global companies, and the ways of how to streamline the
Do You Know How to Collect and Remit State and Local Sales Taxes?
For global companies, understanding the nuances of U.S. state and local sales taxes is paramount. Most states administer local sales taxes through the state, but some states have cities or counties manage their own taxes, necessitating separate filings. States like that are called "home-rule" states. For example, Colorado and Louisiana follow home-rule administration, while taxes in Alabama cities and counties are administered by the state and by non-governmental agencies. Not knowing these nuances, when filing and remitting tax, can result in fines and penalties.
Several states, including Alabama, Texas, Illinois, and Alaska, also have separate collection schemes for so-called “remote” sellers and marketplace facilitators. Businesses that do not have a physical presence in a state but sell beyond a state-set threshold to its residents, known as creating an economic nexus, will be required to collect and remit sales and use tax. Registration requirements vary by U.S. state; therefore, knowing the threshold for economic nexus in each state to stay compliant is critical.
Complications arise when dealing with returned merchandise, as seen in a 2015 class-action settlement involving Walmart. Refunding the correct tax rate on returned merchandise – i.e. the same rate that was collected on the initial sale - is vital to avoid legal and public relations issues. The challenge is compounded by the constant changes in local tax rates, with hundreds of adjustments occurring every year.
Local Tax and Taxability
Navigating various tax rates is just the tip of the iceberg. Global companies must also contend with differences in taxability across different jurisdictions. Home-rule jurisdictions often tax different purchases than the state or other local areas. Items such as food, clothing, software, building materials, and manufacturing equipment may be subject to varying rules or tax rates (or exemptions) not just by state, but also by locality.
For instance, New York state exempts clothing priced under $110 from sales tax, but this exemption may not apply uniformly across all counties. Similarly, the taxability of downloaded software in Colorado can differ between state-administered areas and home rule cities.
On-Site Sales vs. Online Sales
Determining the applicable sales tax rate for online (or mail-order) sales (as opposed to on-site sales) adds another layer of complexity. While most states follow a destination-based model, some operate on an origin-based system, introducing complications based on the seller's location and nexus in the destination state.
Thus, understanding the intricacies of online sales is crucial. Intrastate destinations may involve collecting taxes at the store location or the destination (or both), while shipments from out of state necessitate awareness of nexus requirements in the destination state.
Sales Tax Holidays
Approximately 20 states observe annual sales tax holidays, each with a unique set of rules. These events offer tax breaks on specific items, such as back-to-school clothing and supplies, child-care items, or energy-efficient products. However, the definition of eligible items and applicable price caps can vary significantly between states, posing additional compliance challenges for global companies.
Single Item Caps, Splits, and Surcharges
Certain jurisdictions impose caps, rate shifts, and/or surcharges based on the price of a single item. This significantly affects the overall tax calculation, requiring businesses to stay informed about specific rules in each locality. For instance, some cities in Arizona and Alaska have rate shifts based on item price, while in Florida, county sales tax is only charged on the first $5,000 of a single item.
Remitting Sales and Use Tax
Sales and use taxes, once collected, must be properly reported and remitted on a sales tax return to the relevant taxing authority. The return provides information about the sales made during a specific period and reports the amount of sales tax owed. Businesses registered for sales tax purposes are required to file sales tax returns. Small business owners as well as large corporations must comply with local tax reporting regulations; the local tax authority or a SALT (State and Local Tax) professional can help determine specific filing obligations. Generally, businesses file monthly reports but depending on the jurisdiction, the requirement may be monthly, quarterly, semi-annual, or annual. Most tax authorities offer online platforms or electronic filing options for submitting sales tax returns, which is often convenient, fast, and reduces the chances of errors. Failure to file or late filing can lead to penalties, fines, interest charges on unpaid taxes, late fees, or even legal action. To avoid negative consequences, it is important to meet filing deadlines and fulfill tax obligations promptly.
A Constantly Changing Landscape
Tax regulations are dynamic and subject to frequent changes. Tax rates, rules, and returns themselves may vary by industry, or by in-state versus remote sellers and marketplace providers. Staying abreast of modifications is critical for businesses. Some jurisdictions may reverse decisions, shift tax treatment for specific products or services, or introduce new exemptions. Being proactive in monitoring legislative updates ensures compliance and avoids potential legal pitfalls.
Global Solutions for Managing Indirect Tax Complexity
Achieving U.S. state and local compliance for global operations, especially in the realm of sales taxes, is a multifaceted challenge. Global companies must navigate diverse tax rates, varying taxability rules, and complex regulations associated with delivery, returns, and unique events like sales tax holidays. To navigate these difficulties, global companies often have local tax compliance teams in place and must implement specialized software. This contributes to the already complex ecosystem of disparate tax and accounting tools required for financial compliance.
When it comes to sales and use tax complexity in the U.S., only a few vendors can provide multinational corporations with a solution that can handle indirect tax compliance on a global level. One of them is SAP Document and Reporting Compliance. This solution empowers international businesses to fulfill local compliance mandates, from electronic business documents to statutory reporting, and automate compliance processes worldwide
In 2024, SAP partnered with CCH® SureTax® from Wolters Kluwer to address U.S. sales and use tax compliance complexity. CCH SureTax for SAP Document and Reporting Compliance now enables multinational companies running on SAP S/4HANA Cloud to generate sales and use tax returns, then file and remit them directly in SAP Document and Reporting Compliance. This allows customers to reap the benefits of their ERP functionality and unify global indirect tax compliance, often saving money on local compliance function governance.
For multinational companies, especially operating in high-volume and highly regulated industries, such as retail, wholesale distribution, or industrial manufacturing, CCH SureTax for SAP Document and Reporting Compliance can significantly alleviate the complexity of U.S. tax reporting. By streamlining reporting, they increase global operations transparency, efficiency and capacity for their teams, and, most importantly, mitigate indirect tax noncompliance risk.
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