I usually think of the federal income tax as the biggest tax compliance headache for companies, but a new report from Grant Thornton is a stark reminder that state and local taxes are becoming more and more challenging. Forty percent of the CFOs polled by the audit firm say that state and local tax compliance is more demanding than federal income tax compliance. In Michigan, which has just implemented a new business tax system, that figure rises to 64 percent.

Grant Thornton didn’t look specifically at sales and use tax issues, but it’s clear that this area is fast becoming just as demanding as state and local income tax, or more so.

The income taxes are generally based on the three apportionment factors of sales, property, and payroll, points out Steven Parish, managing director of state and local tax with RSM McGladrey, and “it’s pretty standardized, across the board, what each government looks at.” But with sales and use tax, “each state — and in some cases, such as Alabama, Louisiana, and Colorado, a county or city — can establish its own tax rates and its own tax rules.

“So you basically have 45 states out there determining what’s taxable and what’s not and what their tax rates are, which makes it very challenging for corporations to keep up with all of the rules.”

While state income tax rates have stayed fairly stable in recent years, sales and use tax rates have been creeping upward, Parish adds. “Corporations have not paid a lot of attention to it in the past, but all of a sudden what you’re looking at is 8 to 10 percent of your sales that, if not documented correctly, can result in liability. That’s starting to open a lot of eyes.”

Fortunately, the right technology can give companies a better handle on the sales and use challenge, and I’ll delve into that in my next post. ###