Another Planning and Budgeting Process that is Becoming Necessary
The June 2018 Supreme Court’s landmark decision in South Dakota v Wayfair, Inc. allows states to compel sales tax collection and remittance not just based on physical presence of sellers in the state but also on economic nexus, meaning engaging in marketing and selling activities without the traditional requirements of a physical office location, warehouses, local employees or representatives, etc.
This came as a surprise to many retailers and direct to end user sellers, many relying on e-commerce. These are mostly SMBs (Small and Medium Sized Businesses), that were never required to collect, report and remit sales tax, other than in their home state or in states they had physical nexus. As of the writing of this blog, all but two states with sales tax laws have adopted these new rules and require remote sellers who trigger certain sales volume thresholds to register for the collection, reporting and remittance of sales tax.
Many companies had to add new accounting processes to be able to comply with these new rules. The majority of such companies use a third-party software provider to help manage these activities, usually through a tight integration with their ERP software or accounting solution.
Companies that are currently not registered in certain states to collect and remit sales tax are required to continually monitor sales volumes monthly in order to determine whether or not they must register in these states. To make things more complicated, there are many variations on these sales volume minimums and how one must measure them, and changes to these standards are still being made by many states.
Regardless of how one must determine if and when their company is obligated to register for the collection and remittance of sales tax, there is one more finance department activity that comes to mind: Expanded planning and budgeting for sales tax.
If a significant portion of your sales are in interstate markets, you may experience changes to your cash flow, especially if you sell on terms (e.g., NET30 or NET60). Depending on when you complete and record the sales in the accounting period (i.e., month), you may find yourself having to remit sales tax you billed your out of state customers before you are able to collect the receivables from these customers.
Most states require a monthly deposit of all sales tax collected in the previous month so planning for sales tax liability and cash flow is prudent. You must forecast the sales tax liability in each accounting period and the cash required in order to pay this liability. This will affect your forecasted balance sheet and statement of cash flows and will aid in assessing the financial health of the organization in the months to come.
With FP&A (Finance, Planning and Analysis) software solutions that are executed using Intelligent Planning, you can model the effect of sales tax liability and cash requirements in all budget periods. Using business logic and accounting rules built into the software, users can reasonably forecast the amount of sales tax owed at each period-end and the effect all sales tax remittance requirements have on cash flow. The forecasted balance sheet and statement of cash flows will seamlessly reflect these amounts, always in sync with the sales budget and the income statement derived from it.
Many people may dismiss budgeting for sales tax liability and its implied cash requirements as unnecessary or immaterial to the budget results. However, recalling that sales tax rates in many states approach (and some actually reach) 10% of the product price, then sales tax, especially if you need to comply in more than a few states, is no longer insignificant and should become an important component in the balance sheet and cash flow forecasts.
Another factor to consider is that the lower your gross margin in the products you sell, the more critical it is to be able to plan for the changes to cash flow resulting from these new sales tax rules. This is due to the fact that the overall sales tax liability and its cash requirement can be an increasingly larger percentage of the company’s gross profit and therefore will require special attention to planning the sales tax component of the overall company cash flow.
With Intelligent Planning solutions you can confidently add these new tasks to the existing plan and budget and let the system produce all the necessary forward-looking financial statements and reports.
Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publicly held companies in the Hi-Tech industry, such as Hybrid Arts, Inc., Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.
Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.