Moderated by Kate, Financial Technology advisor at Hyperbots
Kate: Hello, everyone! My name is Kate, and I’m a financial technology advisor here at Hyperbots. Today, I’m thrilled to have Shaun Walker as my guest. Hey, Shaun, how are you doing today?
Shaun Walker: Doing good. How are you?
Kate: I’m doing great. Thank you so much for joining us today. So a little bit about Shaun, he’s the Sox compliance manager at Northrock Southern, and today we will be discussing managing sales and use taxes from sellers’ and buyers’ perspectives. So let’s jump right in.
Shaun Walker: Okay.
Kate: So, coming to the first question, could you give us an overview of the types of sales and use taxes that businesses need to consider in the United States?
Shaun Walker: Certainly. So there’s several types of sales and use taxes, and they vary by jurisdiction. At the broadest level, you have the state sales tax, which is set by each state. Many states allow county and city sales tax to add to the state rate. In some areas, there are transit taxes to fund public transportation. There are special purpose taxes for projects, and there are district taxes for supporting schools or other initiatives. Certain products like alcohol or tobacco are subject to excise tax. There have also been decisions about how to collect remote sales tax. And then there’s the use tax for items bought out of state but used in-state. The last one would be a digital sales tax that applies to online services like software and media subscriptions.
Kate: Okay, understood. Moving on from a seller’s perspective, how should a business determine whether they have a legal obligation or nexus to collect sales tax?
Shaun Walker: Well, nexus can be complex because it’s based on physical and economic presence. Physical presence can mean having a warehouse, office, or employees in a state, while economic presence involves reaching a specific level of sales in a state. Most states set a threshold, often $100,000 in sales or 200 transactions annually, which creates economic nexus.
Kate: Makes sense. So, Shaun, once a seller has determined nexus, how do they handle the collection and remittance of sales taxes?
Shaun Walker: Once a seller has nexus, they must register in each relevant state or local jurisdiction. They need to apply the correct tax rate to sales, which can vary within states due to local add-ons. There’s also automated tax software like Avalara or TaxJar that helps sellers keep rates accurate.
Kate: I understand. So for buyers, when does use tax come into play, and how should they handle it?
Shaun Walker: Use tax applies when a buyer purchases goods from an out-of-state seller who didn’t collect sales tax. It’s the buyer’s responsibility to report and remit the use tax in their home state. This often occurs when a business buys from a small out-of-state vendor or an online seller without nexus in the buyer’s state.
Kate: Makes sense. So, coming to the next question, what are some common mistakes businesses make when managing sales and use taxes? And how can they avoid them?
Shaun Walker: Common mistakes include failing to correctly determine nexus, underestimating the complexity of multi-jurisdictional tax rates, and not keeping exemption certificates. Businesses can avoid these pitfalls by regularly reviewing nexus in each jurisdiction, using tax software for rate accuracy, and maintaining exemption documentation. Frequent audits also help catch errors early.
Kate: That is a very interesting point. Coming to an even more interesting question, how can AI play a role in improving the management of sales and use of taxes for businesses?
Shaun Walker: AI can streamline the sales and use tax process in several ways. AI tools can automatically determine tax rates based on location, identify nexus patterns through sales data analysis, and flag transactions with potential tax discrepancies. AI also simplifies audits by quickly scanning transaction records and identifying anomalies, ensuring compliance with regional tax codes.
Kate: I completely agree with you. So how should businesses handle sales tax exemptions, and what documentation is required to support these exemptions?
Shaun Walker: Businesses need to collect exemption certificates for any sales-tax-exempt transactions. Buyers, like resellers or nonprofits, provide these certificates to show eligibility. Sellers should keep these documents on file to ensure they’re current and complete. Some states require renewals periodically, so it’s important to validate these certificates for legitimacy.
Kate: I couldn’t agree more with you, Shawn, on this. We have reached almost the end of our discussion today. Finally, from a buyer’s perspective, what should companies consider when purchasing from out-of-state or foreign sellers to ensure compliance with sales and use tax laws?
Shaun Walker: Buyers should confirm whether the seller will collect the sales tax, as some out-of-state or foreign vendors may not. If the sales tax isn’t collected, the buyer must record the purchase and remit use tax to their state. For larger or recurring purchases, it may be worthwhile to establish a formal process to track use tax obligations and ensure all necessary taxes are paid correctly.
Kate: That is a very unique point. I totally agree with you, Shawn.
With that, we have come to an end to today’s discussion on managing sales and using taxes from sellers’ and buyers’ perspectives. Thank you so much, Shaun, for joining us today and sharing your insights, and a big thanks to our listeners as well.
Kate: I’ll see you around. Have a great day ahead.
Shaun Walker: Alright, take care!
Kate: Yeah, bye.
Shaun Walker: Bye.
