Sales and use tax optional reporting methodology.

• Author: Mucke, Christopher A.

For many companies, sales and use tax is the most administratively burdensome tax levied. The transactional nature of the tax, coupled with the complexity of sales and use tax laws, can create a compliance nightmare. However, many states (and taxpayers) have embraced a new simplified sales and use tax reporting process, most commonly known as managed compliance or formulary reporting.

Traditional sales and use tax compliance for a taxpayer consists of determining the taxability of a purchase and remitting the proper amount of tax to either a vendor or a taxing jurisdiction. Determining the taxability of a transaction usually requires an intimate understanding of the law, as well as a thorough knowledge of the item being purchased. Once the taxability of the item has been determined, calculating the proper amount of tax due can also be an arduous task. Calculating the correct amount of tax due may also require an understanding of how the vendor will invoice the item being sold.

Through managed compliance, a sales and use tax compliance agreement (SUTCA) is negotiated between a taxpayer and a taxing jurisdiction. The SUTCA provides for simplified reporting and establishes parameters through which future reporting periods will be reviewed and treated. Through this agreement, a company's future sales and use tax base is calculated by applying a pre-determined taxability ratio to the company's total, purchases. This total is then multiplied by the applicable tax rate to determine the proper tax liability. As these agreements usually stipulate that a taxpayer obtain direct pay permit authorization from a state, they generally apply only to large taxpayer locations.

A taxability ratio is usually calculated by conducting a review of a company's purchasing records. The review is aimed at accurately determining the amount of taxable purchases made by the company in a given period. The taxability ratio is then calculated by dividing taxable purchases by total purchases.

Usually, prior to implementation, a taxability ratio is reviewed by the taxing jurisdiction. Once the ratio has been agreed to and a taxpayer has received direct pay permit authorization, the SUTCA is formed, specifying the terms of the prospective...