Sales Tax Compliance: Software, Outsource or Do It In-House?

Should I keep sales tax in house, use software, or hand it to a professional?

Match the setup to how many states you file in, how clear your product taxability is, and who ties each return to the books. Software can calculate tax at checkout. It does not decide where you owe tax or whether a return matches your books, and a product set up with the wrong rule can leave you owing the tax or reimbursing your provider.

In-house filing can stop working when the filing list outgrows what one person can reconcile each month, or when a state letter arrives that nobody can answer. What drives the cost of hiring help is how many returns you file a year (states times how often each state asks), how many registrations are still to be made, and how much sales data needs cleaning up first.

A case is not simple when you are registered or about to register in several states, a product's taxability is unclear (software subscriptions are the common case), returns were skipped, or a return does not match the books. Start with the permit list, sales by state and month, and the last returns; the full list is at the end.

What can sales tax compliance software calculate and file?

Sales tax compliance is six jobs: registering, setting product taxability, calculating, filing and paying, reconciling to the books, and answering notices. A certified provider covers most of them in Streamlined member states, and calculation-only software covers the calculating. The rest stay with a person.

Can sales tax filings be truly automated?

In part. Calculation can be automated, and in Streamlined member states a certified provider can file and pay. Outside them, returns are filed in each state's own system by you or by someone you authorize in that state's way. Tools differ in which states they file in and what they check, so ask which states a tool files in, whether it files zero returns, and who is named on each state account. A tool that files from unreconciled data files it as given.

Three traps recur:

• Filing from unreconciled sales. A return built from sales data that has not been tied to orders, refunds and marketplace reports can be filed on schedule and still be wrong, for example when a marketplace sale is counted both in your store's totals and in the marketplace's collection report. See Reconciling sales and payouts.
• Registering where nothing is owed. Registering starts the filing duty: a seller is responsible for collecting and paying tax from its registration date, and registering through the Streamlined system (the shared registration the member states run) does not clear tax on earlier sales except in states offering amnesty (Streamlined registration). Confirm that a state's standard is met before registering.
• Skipped zero returns. In Streamlined member states, California and New York, returns are due even with no sales (Streamlined registration; California; New York). A tool set to file only when tax is due may miss these. For deadlines, penalties and missed returns, see Filing sales tax returns.

What still needs a person, whatever tool I pick?

Most of these stay with a person even when a tool does the calculating or filing.

• Where you owe tax. Registration is required in each state where you have met its physical or economic nexus standard (a connection such as a store, staff or stock there, or sales above its threshold) or another requirement (Streamlined registration). See When you must collect sales tax.
• Product taxability. A certified provider determines taxability from how each product is mapped, and the state's data relief does not cover a wrong mapping. Whether a plan, service or bundle is taxable in a state is a separate question; see Sales tax on SaaS and software.
• Exemption certificates. California tells practitioners that clients should keep the documents that support nontaxable sales (CDTFA). See Exemption certificates from customers.
• Notices and audits outside a provider's scope. A state generally contacts you directly unless a provider is compensated for your account, and the provider may still need records from you (CSP FAQs). See Sales tax audit.
• Past periods. Sales that were never taxed need their own plan. See Catching up on uncollected sales tax.
• The books. A liability balance that differs from the return needs a person to trace it. See Sales tax payable does not match the return.

What is a certified service provider, and which sellers get its service free?

A certified service provider (CSP) is an agent certified under the Streamlined Sales and Use Tax Agreement to perform a seller's sales and use tax functions, other than tax on the seller's own purchases. Streamlined member states pay the provider for sellers who meet the tests below, so those sellers pay the provider nothing for the covered services (What is a CSP). A state may or may not let these sellers keep its collection allowance, so ask each state (CSP FAQs).

To get free service in a state, a seller must register for that state through the Streamlined Sales Tax Registration System, contract with a provider, and meet all of these in the 12 months before registering there (Free services):

• no fixed place of business in the state for more than 30 days;
• less than $50,000 of property and less than $50,000 of payroll in the state;
• less than 25% of its total property or total payroll in the state;
• not collecting the state's tax as a condition of the seller or an affiliate being a supplier to that state.

For these tests, property is real and tangible property the seller owns or rents: owned at original cost, rented at eight times its net annual rent, averaged over the start and end of the 12 months. Payroll is pay to employees, assigned to a state under the contract's location rules (provider contract).

A remote seller that must collect in a state only because it passed the state's economic nexus threshold qualifies there. A seller related (under Internal Revenue Code section 267(b) or 707(b)) to an entity that does not meet these tests in the state does not qualify if that entity provides services on the seller's behalf, such as delivering its products, taking its returns or handling its customer complaints, or if the two were structured or restructured on or after June 21, 2018 so the seller would now qualify. This exclusion does not apply to a seller properly registered through the Streamlined system as a CSP-compensated seller before September 1, 2020, unless it has structured or restructured since June 21, 2018 (provider contract). Free status ends in a state if the seller must register there and stops meeting all the tests. These tests come from the provider contract between the Streamlined Governing Board and providers, so check the Free services page for the terms in force when you register. The "compensated seller" label only decides who pays the provider; it does not decide whether you must collect tax (CSP FAQs).

A provider may charge for states where you do not qualify, states where you are registered directly instead of through the Streamlined system, states that are not Streamlined members, extra services such as accounting or consulting, and processing nontaxable transactions above 30% of a state's annual transactions. Streamlined's registration page lists the member states. California, New York and Texas are not on it, so returns for those states are filed directly with the state, by the seller or its professional.

Streamlined member states also certify calculation-only software. A seller using it keeps the filing and the payment, and the state contacts the seller directly in an audit (CSP FAQs).

If the software or provider gets it wrong, who owes the tax?

It depends on the tool. With calculation-only software, the seller stays liable to the state for reporting and paying the tax; the software's provider is liable to the state for underpayments caused by errors in how the software works. With a certified provider, the provider is liable to the state for the tax on the transactions it processes, unless the seller misrepresented what it sells or committed fraud. Outside the Streamlined system, the registered seller generally owes it unless that state's relief rule applies.

Washington's statute, which implements the Streamlined agreement, says this in terms (RCW 82.58.080); check your own state's statute. Two limits: the seller can be audited on transactions the provider did not process, and still owes tax it did not send the provider by the return's due date (provider contract, Section E.2).

Streamlined member states also relieve a seller using a certified provider or certified calculation software from liability for some errors (CSP FAQs):

A wrong mapping is not an error in state data, so no state relief applies. Under the provider contract, the provider is liable to the state for mapping errors that leave tax uncollected, whoever did the mapping; its own contract with the seller may require the seller to reimburse it when the seller's action or inaction caused the error (provider contract, Section E.3(c); CSP FAQs). Until a provider's contract begins, the seller files and pays itself. Other states set their own relief rules; check the state's own guidance.

Hiring a bookkeeper or CPA changes who does the work, not whose account it is. The professional acts on the seller's behalf under the seller's authorization, and New York's authorization form has the taxpayer agree to examine the information reported and verify that it is true, correct and complete (Form TR-2000).

People behind an entity can also owe the tax personally; a sole proprietor owes it directly. In California, after a business ends, an officer, member, manager, partner or other person who controlled the entity or was charged with its returns or tax payments can personally owe unpaid sales tax it charged customers (or specified use tax), plus interest and penalties, if they willfully failed to pay. This covers only periods when they had that responsibility, within time limits (Revenue and Taxation Code section 6829). Other states have their own rules; see Filing sales tax returns.

What do a bookkeeper or CPA do that software does not, and how do they get access?

A bookkeeper or CPA handles the parts a tool cannot: working out where registration is needed, checking how products are mapped, tying each return to the books, filing in states outside a provider, and answering state letters. To act in a state, the professional needs the seller's authorization.

States split this into two permissions: one to file and pay online, one to speak for you on notices and audits. The rules differ by state; these two show the pattern.

In California, a power of attorney does not by itself give online filing access: a representative who wants to perform online functions needs Third Party Access as well (CDTFA). CDTFA-392 asks for one identifier per appointee, such as a CPA, bar, PTIN or enrolled agent number, so the appointee need not be a CPA (CDTFA-392). Ask which individual will be named on each state's form and who signs the return. Other states have their own forms, logins and frequencies; check the state revenue department's own site before assuming either state's steps apply. For deadlines and filing when there were no sales, see Filing sales tax returns.

Do marketplace sales change what I file myself?

They change how you report those sales and what you owe on them. Whether you still need a permit and returns depends on the state. A registered seller keeps filing, reports marketplace sales the way the state directs, and keeps proof that the marketplace collected the tax. Sales on your own site or by direct invoice stay yours.

• California. A seller whose tangible goods sell only through registered marketplace facilitators is generally not required to register; direct sales on its own site can still create a registration duty. A registered seller keeps the facilitator's agreement or other proof that it is registered, and its permit number (CDTFA).
• New York. A seller based in New York that sells only through a marketplace provider still registers and files returns; certain out-of-state sellers are not required to register. A registered seller keeps the provider's Certificate of Collection or the provider's public agreement (New York).

Both rules are about tangible goods. A software or service sale through a platform is a different question; see Merchant of record for SaaS sales tax. For how marketplace sales appear on a return, see Filing sales tax returns. If you run the platform, see Marketplace facilitator rules for startups.

What do I hand over to start?

Give the person or provider enough to rebuild each return from records, not from the tool's totals.

• A permit list by state: permit number, filing frequency, due dates and who holds each login.
• The last filed returns, payment confirmations and any state letters.
• Sales by state and month: gross sales, marketplace sales, direct sales, refunds.
• Your products and how each is taxed or mapped in each state.
• Exemption and resale certificates, and marketplace agreements or collection reports.
• Payout reports from your payment processors and marketplaces.
• The sales tax liability account from your books.
• The EIN, the owner, officer or partner who can sign state authorizations, and the mailing address and email on each state account, where state letters go.

Example

These examples are illustrative. All amounts are in US dollars.

An online store with permits in some of its states

An online store ships to buyers in 12 states and holds permits in 6, with US$400,000 of yearly sales, US$100,000 of it through a marketplace. Calculation software charges the rate for where each sale is sourced at checkout in the 6 permit states. Each month someone ties sales by state to the 6 returns and to the marketplace's collection reports. The other 6 states are checked against each state's threshold; see Sales tax economic nexus thresholds by state.

A software company with one plan mapped wrongly

A software company has US$800,000 of yearly subscriptions and permits in 4 states. In one of them, a Streamlined member state that taxes the product, it uses a certified provider but mapped one plan as non-taxable. State relief covers wrong rate, boundary or taxability-library data, not a wrong product mapping. If US$60,000 of that plan's sales were untaxed at an illustrative 6% rate, US$3,600 of tax is uncollected, before any interest or penalty. The provider is liable to the state for it, but its contract with the company may require the company to reimburse it because the company did the mapping. A mapping error can repeat in every state where the plan is sold.

A seller gives its CPA access in California

A seller with a California permit wants its CPA to file monthly returns and answer a state letter. The seller approves the CPA's Third Party Access so the CPA can file and pay, and signs a power of attorney naming the CPA personally, not the firm, for notices and audits. The permit stays in the seller's name, and the seller still reviews the numbers before they are filed.

Different for you?

• You are registered, or about to register, in several states, product taxability is unclear, or returns and books disagree: deciding which filings stay with software, which need a person and what to authorize takes a review of your actual registrations and records; get bookkeeping help.
• You are unsure which states you owe: see When you must collect sales tax.
• You or the business are based outside the US: see Foreign sellers and sales tax and US sales tax on software sold from Canada.
• You sold taxable items without collecting tax: see Catching up on uncollected sales tax.
• You sell through a store platform and need to know which states to switch on: see Shopify sales tax by state.
• You sell software through a platform that sells for you: see Merchant of record for SaaS sales tax.
• A state sent an audit notice or information request: see Sales tax audit.
• Your liability report does not match the filed return: see Sales tax payable does not match the return.
• You missed returns or need deadlines: see Filing sales tax returns.
• Several years of books are behind: see Catching up on overdue books.