Building a business happens a lot of ways whether that means buying competitors, taking on new products, selling internationally, or going through a new distribution channel. Unfortunately, all of these critical activities also come with some pretty complex tax obligations and audit risks. Before you take expansion too far, understand how it affects your tax obligations and what you can do to keep risk in check. Here are five ways your success can be your downfall when it comes to tax compliance:
Expanding your operations.
Adding new locations or products to your business can help increase sales volume. It can also increase your tax obligations. Expanding your physical footprint can trigger “nexus,” which is a connection between you (the seller) and the state or municipality in which you now have a presence. Given the number of jurisdictions in the U.S. (12,000+), even well-intentioned companies are hard pressed to get sales tax right.
Independent contractors can be helpful in increasing operational capacity without committing to ongoing fixed costs or for seasonal staffing needs for construction firms or retailers. However, contract employees can also add to your compliance burden. Hiring, documenting, and managing 1099s and other requirements are highly prone to error, especially when handled manually. Without a bulk validation tool, you are exposed to increased audit risk from incomplete or missing 1099s.
Introducing new products and services.
Innovation can position a company to grab more market share, increase shareholder value and meet customer demand. But as the number of new products and services proliferates, so does transactional tax risk. What one state deems as taxable another might view as tax-exempt. Product taxability rules in the U.S. change an estimated nine million times annually. Multiply the number of products by the number of jurisdictions by the number of exemptions by the number of rules and you’ll start to get the picture of how easy it could be to unwittingly over- or under-charge sales tax.
Expanding routes to market.
As relationships with distributors, manufacturers, and others along the supply chain proliferate, the levels of exposure to tax risk grow as well. Selling online? More than 20 states now have some kind of Internet sales tax, giving states more control over out-of-state seller activity. Fulfillment by Amazon (FBA) or similar partnerships are a great way to shorten the distance between the product and the end-user, lower overhead and storage costs and scale operations. However, fulfillment centers and drop shippers can be significant enough physical presence to create nexus in certain states and trigger a tax obligation.
Growth itself–more money, more problems.
Outsourcing logistics frees up time to focus on selling and merchandising. Having fulfillment, warehousing, and delivery activities handled by third-party providers not only lowers overall spend, it helps improve customer service. These providers are experts in what they do. So they can respond quickly and scale to meet demand easier than you can.
Don’t let business gains become compliance pains. You can make sure you’re not creating risk by understanding how growth plans could create new tax obligations, keep up with changes in rates and product taxability, and automate indirect tax tasks in your accounting system. By automating these critical business operations, you’ll ensure compliance while freeing up existing resource so you can use them where they really count: growing your business.
Learn more about how automation works in your existing ERP system by reading the free whitepaper “Tax Compliance in the ERP System.”
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