Direct Sales Accounting: Why Calculating Sales Tax Is Just the Beginning
As you’ve certainly noticed, direct sales accounting is much more complicated than keeping the books for most other types of companies.
When a company first launches, there’s only a limited number of sales reps to keep track of, and they’re probably in a limited geographic area. But from there, things can really grow in both volume and complexity.
Think of how many different states your sales reps live in. Now, think of how many of them are selling products across state lines—or even into other countries.
Are you responsible for paying sales tax in each of these jurisdictions? How about filing income tax in each location?
Even if your company has a full-time direct sales accounting staff, these aren’t easy questions to answer.
Can You Answer These Tricky Tax Questions?
You’re no doubt familiar with how South Dakota vs. Wayfair affected the direct selling industry. Now more than ever, your company has to be careful about how the physical presence of its sales reps—or even the economic presence of the sales your reps make—will leave you liable for paying sales tax.
But direct sales accounting challenges go far beyond that. For example, how are you mapping your SKUs?
Too many direct sales companies don’t include enough detail in their SKUs. As a result, they’re never really sure they’re paying sales taxes at the correct rate. What might be considered a food product in one jurisdiction may not be in another. Businesses that fail to describe products accurately in their SKUs may find themselves subject to paying back taxes when jurisdictions catch these inaccuracies—a very unpleasant surprise.
And then there’s income tax. You probably have independent sales consultants in just about every state. Do you have to pay income tax in each of these states?
The procedure here relies on a federal rule. If your headquarters are in, say, Louisiana, and one of your sales reps in Montana makes a sale, you won’t trigger an income tax nexus in Montana. That’s a clear case.
But there are several situations in which it starts to get murky. For example, a direct selling company may send its executives into a state to put on a roadshow—and during that roadshow, the executive may make some sales. Or, a direct sales company may charge its independent consultants a fee to use the company’s back-office software. Or, a company may not realize that one of its corporate office employees is actually working remotely from their home in a neighboring state.
Each of these situations can expose your company to unforeseen income tax liabilities. Don’t “wing it” on your income taxes. Play it safe by working with a qualified direct sales accounting partner to ensure you’re keeping your books accurately.
Experts Can Help with Your Direct Sales Accounting
Many direct sales companies will connect to a sales tax calculation platform and think they’re doing due diligence for proper tax calculations. These platforms are wonderful—but they can’t answer questions about unique tax nexus situations. For that, you need the help of a direct sales accounting partner that is deeply integrated to your direct sales platform.
Thatcher Technology relies on set of key partners for expertise like accounting and income tax. For direct sales accounting, we’ve worked with Squire and Company for many years. They also know the value of integrating your accounting system with the robust accounting features of Prowess. Call on Squire to take your accounting practices to the next level—and to protect your company from unforeseen tax liabilities.