As a business owner or tax professional, it’s likely you pay close attention to themes like sales tax compliance largely due to the negative consequences — financial and otherwise — if you were to not do this. Did you realize, though, that staying compliant with such regulations is actually an avenue to increased profitability for many businesses all on its own?
At SalesTaxSolutions.US, we’re happy to offer a variety of sales tax and related services to business clients, including compliance reviews and several related tools that will help you stay compliant at all times. What are some ways being compliant not only helps you avoid any penalties for non-compliance, but also actively improves your bottom line in the process? This two-part blog series will go over several basic concepts.
Up-Front Investment Vs Long-Term Benefits
At the core of this issue is the ebb and flow between up-front investment in certain products or services and the long-term benefits these products or services offer. When it comes to sales tax compliance, this theme is simple to represent: An investment in compliance today, while potentially costly from an immediate standpoint, will actually save your business money in the long run by mitigating the financial and reputational risks associated with non-compliance.
Consider the following example: A retail business brings in an annual revenue of $10 million, with a sales tax rate of 7% applied to all transactions. This means that the business pays approximately $700,000 in sales taxes to the state each year. However, the business has a significant problem with sales tax compliance, and as a result ends up owing an additional $50,000 in taxes, interest, and penalties to the state each year. In other words, the business is losing out on nearly 10% of its potential sales tax revenue due to non-compliance.
Now, let’s say that the business owner decides to invest in a sales tax compliance service that costs $5,000 per year. This may seem like a significant up-front investment, but it’s important to remember that the service will pay for itself many times over by preventing the kinds of mistakes that lead to underpayments and penalties. As a result, the business will actually come out ahead by nearly $45,000 each year — and that’s not even counting the peace of mind and time savings that come with having someone else handle your sales tax compliance for you!
Proper compliance with sales tax regulations is not just beneficial for businesses as a whole, but for shareholders as well. This is because compliance-related expenses are typically considered to be “operating expenses,” which means they are deducted from a company’s taxable income before calculating the amount of taxes owed.
This has several implications for shareholders, including reduced taxes, increased dividends, and increased share value. To illustrate this, let’s say that a company has $1 million in taxable income and $100,000 in compliance-related expenses. This would reduce the company’s taxable income to $900,000, which would in turn result in lower taxes owed. Additionally, if the company pays dividends to shareholders, those dividends would be based on the reduced taxable income, meaning shareholders would receive more money. Finally, the reduced taxable income would also lead to an increased earnings per share (EPS) ratio, which is one of the key indicators used by investors to value a company’s stock.
As you can see, proper sales tax compliance can have a major impact on a company’s financial health, both in the short-term and the long-term. In our next blog post, we’ll discuss some further concepts here. For more on this or any of our quality sales tax services, speak to the team at SalesTaxSolutions.US today.