What are the benefits to compliance?

by TaxJar April 19, 2022

There are often serious financial consequences to non-compliance when it comes to sales tax. But you may not know that your company could see financial benefit in the process of becoming compliant. On the surface, it makes no sense – you may have to spend money to find a sales tax software solution or hire tax experts to help your company reach compliance. How could that help your bottom line? To learn how, we spoke to the team at TaxOps, a boutique business tax firm that helps manage sophisticated tax issues for companies globally.

Upfront costs can yield long-term benefits to your business

Leaders of online businesses have one thing on their mind: growth. “Entrepreneurs fly by the seat of their pants,” says Judy Vorndran, a State and Local Tax (SALT) expert and a partner at TaxOps. “Tax is the very last thing that’s considered on the back end – it’s an afterthought.” It can’t stay an afterthought for long. The prospect of tax liabilities can quickly become a reality as the business scales. And remember: your tax liabilities increase as your business grows. 

Vorndran notes that setting up a process to calculate, collect and remit sales tax is key. “If we put a process around [sales tax], your company is actually compliant,” she says. “That can save you millions of dollars.” The money you’ve saved by establishing a sales tax compliance process can go towards exploring new ventures for your company, or hiring new team members. TaxOps can analyze a company to determine how to stay compliant in a given state, often with the help of a sales tax solution like TaxJar, which offers state-specific reports with jurisdictional breakdowns to create a clear picture of liability. 

“Sales tax automation [software] gives you a system of record that deals with your sales tax,” Vorndran says. “This software classifies your revenue by tax type, which can be used for so many different things.” She notes that using the software to create reports drastically shortens the time your finance team spends dealing with any requests from auditors. “Answering an audit takes people’s time and resources,” she says. “It’s going to take hours – they don’t have a full-time job managing audits. You’re asking people to chase their tail finding information instead of having a data source that can answer those questions with transaction-level detail, which is what sales tax is imposed upon.” 

Paying for the advice of a tax advisory firm and a sales tax solution may sound like upfront expenses your company can’t recoup. But that ignores one important fact: states can audit your company for a host of reasons – and that can be much more costly. “The average sales tax audit costs $100,000, including time, effort, penalties, interest and taxes owed – for one state,” Vorndran explains. “If you can put that to bed in a few hours because you automated, you just saved yourself $100,000 in one state. Multiply that by 46.”

Stakeholders benefit from sales tax 

Collecting and remitting sales and use tax in states where your company has a liability has vast, positive effects on communities all across the US. “It’s a civic duty, even though a lot of people don’t think that way,” Vorndran says. “We get a lot of entitlements for our taxes.” 

Some of the main beneficiaries include schools and fire departments. For online-only sellers who have customers in states their company will never physically do business in, it may be difficult for them to personally appreciate the benefits of the sales tax they remit to the state. But taxes also help pay for the upkeep on the roads used to ship goods to their customers. And also, you’re saving the world! Doesn’t it feel great? Compliant companies are literally paving the road to their own success. 

Compliant companies carry a higher valuation

When your company is ready to raise a Series A or get acquired, other companies will inevitably ask to see your financials. “When you’re in startup mode, you’re just trying to keep the lights on and create a viable product to make you more marketable,” explains Meredith Smith, a Senior Tax Manager of State and Local Tax. “But due to the Wayfair ruling almost four years ago, sales tax is always an item in diligence. When you’re not prepared with that information, it’s an escrow item – a holdback item. It’s a risk to investors.”

You can reduce that risk considerably by managing your sales tax compliance ahead of valuation conversations. “Taking care of sales tax compliance early represents that your company has its act together,” Smith notes. “It says, ‘We’re a legit business because we’re willing to put in the effort to make us look like we know what we’re doing.’ That gives investors confidence with what they’re putting their money towards.” 

Not taking care of compliance changes the math considerably. “Some of our clients have had to provide a signed engagement letter to the company acquiring them that says, ‘We’ve paid TaxOps an x-amount of dollars to fix this problem,’” Smith says. “‘We’re going to make this our problem so you’re not inheriting it.’” 

Even if sales tax is not collected and remitted for a couple of years, the tax liabilities don’t go away. “Every year that tax adds up,” Vorndran notes. “You’re protecting all that risk every single year by filing and complying.” Any funds paid to specialty tax firms to clean up past issues and to states in the form of penalties and interest is potential lost profit. 

Stay ahead of your growth with TaxJar 

Sales tax compliance shouldn’t be seen as a pain point for growing companies – it actually has numerous financial benefits. Our sales tax platform will help you track your tax liabilities and automatically calculate the accurate amount of sales tax for every item, in every state. Our platform also compiles orders from all your e-commerce channels into one palace, giving your team access to real-time reports and ensuring you are prepared for growth. To learn more about TaxJar, start a free, 30-day trial today.

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