Scott Peterson is the Vice President of U.S. Tax Policy and Government Relations at Avalara, an industry leader in sales tax automation technologies. With over 25 years of experience, he is an expert in strategic tax planning, corporate taxes, legislative relations, public tax policy and many other fields.

As the Vice President of our ERP practice here at BrainSell, I wanted to get the scoop from Scott on corporate tax compliance strategies in today’s marketplace. Edited for brevity and clarity.

KELLIE: Where do you think all the anxiety around tax compliance comes from?

SCOTT: Well, the number one thing that creates anxiety is the unknown. Back in 2018 when the federal government was doing tax reform there were lots of folks who just didn’t know how these changes would affect their businesses. Many businesses are still trying to adapt to these changes. 

Any time congress changes something related to federal corporate taxes it affects state taxes as well. So, if you’re a business that operates in 25 different states and you need to know how federal changes will affect your bottom line, you have to figure that out for 25 different states all with different tax laws. 

Within six months of the reform folks also had to deal with the aftermath of the Wayfair vs. South Dakota case. And a lot of companies who avoided anything that would force them to collect sales tax now have to collect. So, businesses leaders are dealing with a tremendous amount of change going on. And it’s completely out of their control. 

How does tax compliance affect your bottom line? 

Two main ways. One: compliance comes with a cost. Now, you can do it cheaply – but only if you’re willing to do it poorly. Plenty of people think: “The government will never catch me, so I won’t collect a dime.” Or, “I’ll just charge everything at one rate to make it easy and the government will fix it.” These are extraordinarily risky ways of approaching tax compliance. The cost of fixing mistakes will affect your bottom line. 

Two: if you don’t do tax compliance well, audit assessment expenses will affect your bottom line. The government doesn’t just randomly audit people. If you’re selected for audit it’s because it doesn’t look like you’re doing your taxes right. And when the Department of Revenue figures out what you’re doing wrong, you will need to pay what you owe. The other option is to fight the audit in court – which also costs money because you’ll need to hire legal representation. 

What activities add risk or complexity to tax compliance strategies? 

One of the most common ways that businesses get into trouble is by failing to remit use taxes. Businesses that make purchases from suppliers or third parties that don’t charge sales tax need to remit the use tax for those purchases. Many don’t. And they’re easy targets to auditors. 

The second way is not documenting sales tax exemptions. If you can’t document why you didn’t charge sales tax to someone, the state will make you pay it. You have to manage that documentation. It’s a frustrating process though. Tax compliance is mostly digitized now, but documenting sales tax exemptions is one of the last processes that just hasn’t been digitized yet. 

Why is that? 

To be honest, I’m not sure. There’s never been a real driver for digitizing exemption documentation processes. Tax-exempt sales are a really small part of most businesses, so if only 3% of your sales are tax-exempt, then it’s a question of cost versus benefit. 

And now because of the Wayfair case, we’re completely changing up who is and isn’t supposed to collect taxes. So that cost/benefit question becomes: how complicated will exemption documentation be in the future? It could go either way. Might become more of a priority, might not. 

Most businesses would benefit from tax automation. But what kind of business wouldn’t? 

Imagine a business that doesn’t ship anything, only sells things over the counter in the store, only sells taxable products, and all their products have the same exact tax rate. Oh, and they never sell to anyone who is tax-exempt. I mean, I don’t even know what they would automate.  

So not a lot of businesses? 

Not a lot, no. Most businesses probably need at least some automation. I live in Nashville, and a lot of restaurants here also sell hats and t–shirts or merchandise in addition to food. In Tennessee, that’s three different tax rates right there. And Tennessee isn’t unusual in this regard. 

Consider convenience stores. Extraordinarily complicated businesses for how commonplace they are. Food, clothing, alcohol, tobacco, ammunition, car parts, motor fuel, groceries – just about everything they sell is subject to different tax rates that vary from state to state. 

Are there any trends in tax automation that you’re excited about? 

It’s hard to talk about this without talking about Avalara. We’re on the cutting edge of what’s cool and exciting. I’m personally very interested in the work we’re doing with cross border taxes, which are becoming a big deal. Anytime you sell to people in another country, you’re subject to duties, customs, tariffs. And these things need to be dealt before you sell. We’re automating the heck out of that. 

We’re also developing tools that automate taxes in real-time, at the moment of purchase. Talk about convenience stores – one thing they have in common is they really love using uniform product codes (like the ones used in barcode scanners). Avalara has a product that attaches tax information about that product to the code. So, convenience stores can embed this in the point-of-sale system and it will automatically compute tax rates. A simple and straightforward automation tool for a kind of store that is, by nature, really complicated. 

Do you think lack of tax literacy is a problem for business leaders? 

Actually, I think a lot of business leaders have a better understanding of taxes than non-business leaders. Thing is, if leaders made business decisions solely based on tax consequences, they wouldn’t make great decisions. 

We have a customer who was impacted by the Wayfair case. Their response was to avoid any action that would require them to collect sales taxes in any state and under any circumstance. This affected sales, revenue, hiring practices – everything. An otherwise amazingly well-run and oddly successful company considering these practices, but they were obsessed with tax literacy. And all the literacy in the world couldn’t keep them from being blindsided by the Supreme Court. 

But the job of business leaders is to lead. They hire experts so they don’t have to be experts themselves. And this makes complete sense. This frees up time to direct the strategies and operations that run their company. 

Are you interested in developing a tax compliance strategy? Join us for a webinar on April 16th about sales tax and document management! Or you chat with me about your tax processes.