A recent study conducted by McGladrey LLP (now RSM LLP) suggests that mid-sized businesses may be confused about the filing and payment requirements for sales and use taxes. While paying too much is a burden on any company’s bottom line, there is also the risk of not paying what they owe and, as a result, incurring fines and penalties. The report listed 10 industries that tend to overpay, among them manufacturing, technology, financial services and pharmaceuticals.

The report recommends that businesses conduct a “nexus” audit to determine if they are meeting their sales and use tax obligations. Indeed, the concept of nexus is central to determining which businesses must pay taxes in which states.

The U.S. Supreme Court handed down a decision in the 1990s that established a so-called bright-line rule to determine just that. If the business has a physical presence or an agent in a state, the business must pay sales tax for transactions made in that state. Over time, however, the Internet has gummed up the bright line: E-commerce makes it possible for online retailers to sell plenty of merchandise where they have no physical presence. No presence, no sales tax.

States and local taxing authorities have been trying to clarify the scope of the physical presence nexus with regard to online sales, but the result has been a little less than successful. McGladrey comes close to accusing states of grasping for every dollar they can get for every hint of a sale within their borders.

But what exactly are states trying to collect? What is a sales tax, and how does that differ from a use tax?

We’ll explain in our next post.

Source: Accounting Today, “Businesses Frequently Overpay Sales and Use Taxes,” Michael Cohn, Oct. 13, 2015