Sales and use tax compliance keys for your contracts

Ensuring sales and use tax accuracy is a job that generally falls to your finance team. And it’s a high-pressure job at that.

If A/R doesn’t apply the right tax rate on invoices, issues are bound to ensue. Best-case scenario, customer calls, annoyed, and your team has to spend time backtracking and fixing the error. Worst-case scenario, your company could end up in hot water during a tax audit.

And, on the opposite end of the spectrum, if A/P doesn’t verify sales tax on company purchases, it could end up overpaying or underpaying – which again leads to wasted time and money.

That’s why good communication and solid contract terms between your company and its trading partners are both essential, tax expert Diane Yetter said at a recent industry conference.

The more Finance, Purchasing, and trading partners have reviewed and outlined sales and use tax responsibilities, the less risk everyone faces.

Step 1: Talk it out

Hopefully, you have formal, written contracts for all the trading partners you do business with. But since taxability varies greatly depending on what goods or services are provided by the company, those terms can’t be generic.

So, anytime you bring on a new trading partner, your finance teams should have upfront dialogues about taxability, exemptions, etc. And with current trading partners, you can have these discussions during contract renewals.

Essentially, you want to make sure everyone’s on the same page with both your company’s and the trading partner’s tax obligations, Yetter says.

Step 2: Get it in writing

Of course, after any verbal discussion, your finance teams should document the details in your contracts for legal purposes.

Though each company will require different terms, there are some general items Yetter advises addressing in your contracts with trading partners.

Pass your A/R manager and the head of Sales this list of five items to include in customer contracts:

  1. the taxability of goods or services from your company’s perspective (with agreement from the customer)
  2. your company’s sales tax registration numbers at the state and local levels
  3. a clause that your company will communicate changes to its sales tax registrations to the customer on a timely basis
  4. the method for calculation and payment of sales tax, and
  5. an agreement between your company and the customer to cooperate in the event of a tax audit.

Bonus: This list can also be a great tool for A/P and Purchasing when working with vendors. Pass it along to them as well, so they can verify the same sales and use tax specifics are covered in their vendor contracts.

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