Why offering tax compliance services can benefit your accounting firms and clients

Given the economic and personal upheaval created by COVID-19, now is a good time for accounting firms to embrace cloud functionality and expand into services highly valued by clients, such as sales tax returns preparation and filing.

The events of 2020 accelerated the digital transformation (DX) that began before the emergence of COVID-19. By late June 2020, approximately 42% of the United States labor force was working from home full time. According to Stanford University economics professor Nicholas Bloom, the U.S. has become “a working-from-home economy. Almost twice as many employees are working from home as at work.”

From retailers to accounting firms, businesses dependent on in-person transactions and information exchanges suffered when stay-at-home orders shuttered or placed capacity caps on workplaces. Those already accustomed to transacting business online and in the cloud were able to continue working with minimal service disruptions.

Many businesses have long recognized the advantages of outsourcing routine operational tasks such as payroll services. Increasingly, they’re finding value in outsourcing sales tax compliance as well. Doing so frees time for more profitable activities while increasing accuracy and reducing risk.

Accounting firms aren’t new to sales tax; many have taken on returns preparation and filing to meet client demand. However, sales tax compliance has become more burdensome for businesses since the U.S. Supreme Court issued its decision in South Dakota v. Wayfair, Inc. (June 21, 2018). In overruling a long-standing physical presence rule preventing states from taxing sales by businesses with no physical presence in the state (remote sellers), the decision freed states to impose a sales tax collection obligation on out-of-state businesses.

Following the Wayfair decision, one state after another adopted economic nexus, which bases a sales tax obligation on an out-of-state retailer’s sales and/or transaction volume in the state. As of this writing, economic nexus is in effect in 43 states, the District of Columbia, and a growing number of cities and boroughs in Alaska (where there’s no statewide sales tax). In fact, only two states don’t currently enforce economic nexus: Florida and Missouri. Delaware, Montana, New Hampshire, and Oregon have no general sales tax.

Economic nexus laws are compelling retailers to obtain sales tax permits and collect and remit sales tax in more and more states. Yet not all businesses are liable for sales tax in all states where they sell because most economic nexus states provide safe harbor for small sellers — those with sales or transaction volume beneath the state’s economic nexus threshold.

The small-seller exception is intended to ease the burden of compliance. In practice, it adds a layer of complexity because economic nexus thresholds differ from state to state. For example:

• California’s economic nexus threshold is $500,000 in total combined sales of tangible personal property in the state in the current or preceding calendar year
• New York’s economic nexus threshold is $500,000 in sales and 100 transactions of tangible personal property in the state (including Software as a Service, or SaaS) in the previous four sales tax quarters
• The economic nexus threshold in Illinois is 200 transactions or $100,000 in cumulative gross receipts from sales of tangible personal property and property sold incident to a service in the state in the preceding 12 months (determined quarterly)

Details about each state’s threshold are available in this state-by-state guide to economic nexus laws.

To be sales tax compliant, companies selling into multiple states must clearly understand each state’s economic nexus threshold (including which sales count toward the threshold and which do not) and know how close they are to meeting those thresholds. It’s a lot to monitor and track.

As businesses bow under the additional compliance burdens, they’re discovering the value of partnering with an accounting firm capable of providing multiple accounting functions. This is prompting accounting businesses to expand into sales tax returns preparation and filing services, shifting the burden of compliance to their shoulders.

Automating the returns process enables accounting firms to provide more services to more clients without bringing on more staff. It can turn a resource-draining manual task into a profitable service with a recurring revenue source. It can also improve client satisfaction and retention.

Handling sales tax preparation and returns services manually is labor-intensive, especially for accounting agencies managing sales tax for numerous clients. Using cloud-based technologies to handle returns preparation, filing, and remittance allows firms to free employees from repetitive, time-consuming tasks, improving efficiency and productivity.

This, in turn, allows accounting firms of all sizes to add value for more clients. You can meet the growing needs of existing clients while also opening doors to new clients — without increasing overhead.

The more services an accounting firm can offer clients, the more valued a partner that firm will be. As the burden of sales tax compliance grows, your ability to take on those services will be rewarded with client retention.

Social distancing measures adopted to slow the spread of COVID-19 have underscored the need for cloud-based technologies: Some businesses are still unable to allow employees back in the office or meet clients face-to-face. The situation has forced companies once reliant on analog systems to modernize and embrace new systems that allow employees and clients to stay connected despite physical distance.

For example, automating sales tax returns, filing, and payment services has many benefits. Among others, it allows you to:

• Capitalize on cloud efficiency with secure data and up-to-date information
• Position your firm as a trusted advisor
• Support clients with access from anywhere

The past year has created new challenges for companies in all industries, and more lie ahead. It’s become critical for businesses to streamline services and improve efficiencies.

Avalara Managed Returns for Accountants provides the cloud-based tools, tax content, and support accounting firms need to expand sales tax returns preparation offerings. Learn more about how adding tax compliance services can benefit your accounting firm and clients.