The Sales Tax "Hack" You May Want to Avoid

Everyone loves a good life hack. From freezing coffee in ice cube trays, so you don’t water down your morning beverage to removing deodorant stains with pantyhose (yes, you can do that), hacks have become a great way to make our lives easier. However, there are some things in life that aren’t necessarily “hackable”, and in our opinion, sales tax is one of those things.

Sales tax is very complicated and can cost businesses hundreds of thousands of dollars in penalties and interest if handled incorrectly. When it comes to something as complicated as sales tax, you don’t always want to take the easy way out. In particular, one thing we have seen many businesses do in an effort to “hack” sales tax and make it “easy” is to use a software company, and only a software company, for their sales tax compliance. While there is a time and a place for software, in many circumstances it’s not the “hack” you may have hoped for.

Sales tax software companies will tell you that they have everything under control for you - that there is nothing to worry about. However, we have seen many businesses whose sales tax was not properly handled by these companies, and they end up owing large amounts of money to the states in back tax, penalties, and interest. One reason for this is because of the way software companies handle the Streamlined Sales Tax Project (SSTP). While software companies’ use of the Streamlined Sales Tax Program may seem convenient, they have cost many businesses hundreds of thousands of dollars due to the lack of proper care.

What is the Streamlined Sales Tax Project

The Streamlined Sales Tax Project began in the Fall of 1999 as an effort to simplify sales and use tax across the states and promote compliance. This effort led to the Streamlined Sales and Use Tax Agreement, which accomplishes the following in states that adopt conforming legislation:

  • State-level administration of sales and use tax collections.

  • Uniformity in the state and local tax bases.

  • Uniformity of major tax base definitions.

  • Central, electronic registration system for all member states.

  • Simplification of state and local tax rates.

  • Uniform sourcing rules for all taxable transactions.

  • Simplified administration of exemptions.

  • Simplified tax returns.

  • Simplification of tax remittances.

  • Protection of consumer privacy.

Article I, Section 102  SSUTA

Full-member states are those that have changed their sales tax laws to meet all of the requirements of the Streamlined Sales and Use Tax Agreement. Click here for a list of the current full-member states.

There are many advantages to the Streamlined Sales and Use Tax Agreement. These benefits could include simplified tax compliance and reduced administrative costs for both businesses and state and local tax agencies. Overall, the Streamlined Sales Tax program is intended to promote simplicity and fairness while benefiting both businesses and the states. But now, let’s discuss some of its limitations. 

The Biggest Issue When Using a Software Company and the Streamlined Sales Tax Program

One important thing to remember is that when filing through a software company’s Streamlined Sales Tax Program, there may be separate taxes that are not allowed to be filed through the program itself. For example, the Washington Business and Occupation Tax is generally filed by whoever is filing the sales tax return, because it is part of the state’s sales tax return.  However it is not part of the Streamlined return, so it must be filed separately. Although software companies may address this in the fine print, it is not a great selling point for them, so they often do not communicate this openly to businesses they work with. Therefore, if you do not know how to do this on your own, you will owe back tax, penalties, and interest. 

We have heard many horror stories related to both of the issues addressed above. If you are curious about some of those horror stories, check out this eBook we created on the topic.

So, while using a software company for sales tax compliance may seem easy, it can actually cause much more trouble than you would think. We believe there is a time and a place for software. This is especially true for smaller companies that use software in conjunction with a sales tax compliance provider. Sales tax is extremely complicated, and although the idea of a sales tax hack sounds great, it is important to instead complete thorough research and ensure your compliance.

By: Briana Wagner

This blog is intended for educational purposes and not as tax advice. Tax policies and procedures change frequently, so specific information, such as thresholds, rates, etc. included in this blog may have changed since it was originally published. Please request a consultation for more in-depth information.