SALT: A New Business Frontier
SALT: What is it?
SALT stands for state and local taxation and it encompasses taxes levied by state taxing authorities. It is a body of tax law that runs parallel to federal tax law. SALT includes state sales and use tax, local sales and use tax, franchise tax, corporate income tax, gross receipts tax, oil and gas production tax, motor fuels tax, motor vehicle tax, hotel occupancy tax, mixed beverage tax, etc. Different rules govern each jurisdiction in the United States.
SALT: Why should you care?
SALT translates into dollars. Sales and use tax rates vary from 4% to over 10%, depending on the jurisdiction in which transactions take place. Every purchase and every sale is subject to tax if specific exemption requirements are not met. Many companies pay tax on transactions that are not taxable or pay tax at an incorrect rate. Imagine overpaying tax for a large volume of nontaxable transactions for an extended period of time. One relatively small company had a review that resulted in a refund of over $ 400,000 for a four-year period. Because this company employed a tax department, CPA, and accounts payable staff during the periods reviewed, management was highly skeptical that any recovery was available. Potential SALT recoveries and savings in instances of overpayments can produce surprising dividends.
In the alternative, underpaying state and local tax can be catastrophic. It is imperative that companies know (1) when to charge tax, (2) when to pay tax, (3) how to document tax exemptions on both the sales and purchases cycles, (4) how long to retain documentation, etc. If underpayments are found during a state-conducted audit, interest and (sometimes) penalty will be assessed.
When working in the area of state and local tax it is important to remember that no one can honestly surmise a result without first reviewing your records. How would anyone know about your business and your tax reporting system without looking at your records?