April houses the U.S.’s official “Tax Day,” April 15 (April 17 this year). With so many calculations, calls with accountants, and the flurry of paperwork focused on one day it can be easy to forget how much you and your clients pay out in taxes the rest of the year. For example, while sales taxes are seemingly miniscule amounts when viewed on a purchase by purchase basis, the amounts certainly add up when taken into account as an annual payment like we understand income tax.
While it feels like Uncle Sam takes a pretty penny out of your wallet and your clients’ wallets with the arrival of April each year, there’s more to the picture of taxation. Americans also pay out large sums to their states in addition to the federal government.
The average American paid $8,943 per person in federal income, payroll, and estate taxes in 2016 (Journal Sentinel: How the states rank in per-capita federal taxes, IRS, Census Bureau). Comparatively, Americans paid out $4,875 per capita in state and local taxes in 2015, this includes property, general sales, individual income, and other taxes – such as alcohol, tobacco, or motor vehicle taxes (Tax Foundation Facts and Figures 2018 – How Does Your State Compare).
Of the individuals living in one of the seven states without an individual income tax, residents of Alaska and New Hampshire are the only ones that also don’t have to deal with a state-wide sales tax. However, localities in Alaska are allowed to impose sales taxes, so it’s very unlikely that anyone can make it through a calendar year tax-free.
The gamut of taxes can seem like quite a burden on individuals. Why doesn’t the government collect more of that money from businesses? Well, businesses are already paying a lot.
What About Businesses?
Before the Tax Cuts and Jobs Act reduced the federal corporate income tax from 35 percent to 21 percent, the United States had the highest combined statutory corporate income tax rate among the OECD nations at 38.9 percent (Tax Foundation: The United States’ Corporate Income Tax Rate is Now More in Line with Those Levied by Other Major Nations).
Even with the lower federal corporate income tax, it doesn’t detract from the fact that businesses in the majority of states must also deal with state corporate income tax. Forty-four states levy a corporate income tax and four states – Nevada, Ohio, Texas, and Washington – impose gross receipts tax instead of a corporate income tax.
A lot of time and resources fuel compliance for one tax type due on a single day in April. The IRS estimates that federal business returns will take around 250-300 hours to file (IRS 2017 1120 Instructions; IRS 2017 1120S Instructions). Compliances costs can be quite steep, varying based on service provider, size of firm, and even region.
But what about compliance costs for sales tax? Sales tax returns are due year-round. Depending on the states you or your clients operate in, sales tax returns may have monthly or quarterly due dates. If your clients are not using an automated sales tax system, a lot of hours could be going into sales tax compliance when managing compliance manually.
In 2006, there was a major comprehensive sales tax collection costs study that found for retailer respondents, the weighted average gross compliance costs were 3.09 percent of sales tax collected (PwC: Retail Sales Tax Compliance Costs: A National Estimate). Given that several years have passed since this study and automation has advanced, the cost and complexity of tracking and remitting sales tax has declined. However, it is still an activity that requires year-round attention and compliance costs remain.
For your clients, software subscription costs, potential guidance by sales tax experts, and their own time (which is equal to money) can add up. Things have gotten easier – but just like with income tax, compliance with taxes of all types is part of being in business.
Keep Your Perspective
Due to the emphasis placed on income tax, make sure your clients get the support and information they need to collect and remit sales tax since it’s happening year-round. Help them ask the right questions to address fundamental sales tax issues – from determining nexus to correctly classifying their products.
April 15 may be built up as the national day of gloom for taxpayers, but we encounter sales and use taxes with almost every purchase or sale we make. The full picture of taxes is something everyone from accountants to businesses to individual consumers should be aware of, every day of the year.
- Have you thought about how much time you spend helping your clients comply with different tax types?
- Do your clients stress out more about income tax or sales and use taxes?