4 questions to ask yourself before choosing a sales tax calculation engine

Getting the right sales tax on your invoice is a pivotal step in managing your sales and use tax obligation. Sales and use tax is a tax imposed on the use or consumption of a product or service and meant to be paid by the end consumer. In certain situations (when you have sales tax nexus), it is your obligation to collect and remit it. Unfortunately, this is easier said than done. With cities, counties and states having their own tax rates, taxability rules changing among states and even local jurisdictions, it is almost impossible to ensure you add the correct sales tax to your invoice for a more complex organization. But how do you know what is the best solution for your business to get the correct sales tax on your invoices?

We’ve composed 4 questions below for you to review and ask yourself to determine the best solution for your business.

1. Do you have a sales tax obligation?

While this may be a silly question, it is important that you understand every state and local jurisdiction in which you have established physical or economic nexus and deem your products or services as taxable. You will only charge sales tax once you have an obligation in a location.

If you are a retail location with a physical storefront in a state, then you may only have an obligation where you have storefronts, but if you also sell your products online or sell them wholesale to other stores or sell through a marketplace… you’ll want to look more closely at how you apply the proper sales tax.

There are two key factors necessary to calculate the applicable sales tax – (1) Tax rates; and (2) Taxability rules. (There are other aspects to consider including situs and exemptions, but rates and rules are the cornerstone.) In some situations, these rates and rules can be managed perfectly fine on your own without the need for sales tax calculation software. For example, if you’re selling tangible personal property (generally taxable) in just a few jurisdictions where the tax rates are easily accessible, sales tax calculation software is not necessary.

However, it is considerably more complicated if you are selling tangible personal property across the country where you will need to understand all the current tax rates where you have a customer/client. For this, you can subscribe to a tax rate service that allows you to lookup current sales tax rates, upload the tax rates into your invoicing/ERP system and your invoicing/ERP system will calculate the tax. This can work very effectively with minimal upfront or ongoing cost.

However, if you are selling something like telecommunications or SaaS services on a nationwide basis, or even things that are usually considered TPP but have different taxability rules across some states or jurisdictions, sales tax calculation software is much more important.

3. What software solution best fits my business?

If sales tax calculation software is needed for your business, or you’d just rather rely on software to manage your sales tax calculation, there are additional things to consider to ensure you find the right software for you.

As mentioned above, there are two key pieces of information required to calculate the applicable sales tax – (1) Tax rates; and (2) Taxability rules. It is important to ensure that the software you select has a deep understanding of sales and use tax rules and has a solution that maintains the most accurate rules and rates for your business.

Today, most sales tax calculation software is delivered in the cloud via a Software-as-a-Service model. These tools automate the sales tax calculation process by integrating with the invoicing or ERP system typically via an API (Application Programming Interface). When it comes time to create a customer quote or invoice, the ERP system will pass certain data elements (customer location, product, sales amount, etc.) to the sales tax calculation system which will then calculate the sales tax and pass back to the ERP system the applicable sales tax. This is generally done in real time in sub-second intervals.

There is another important piece of information to verify with the solution you choose. Ensure that they can integrate or have the ability to create an integration for your ERP or billing system. Without this piece you will not be able to automate applying the correct rules and rates to your transactions in a timely fashion.

With the right sales tax calculation software, you can fully automate this step of the process. Look for a solution that provides a modern architecture, robust rules engine, and transparency for reporting. Additionally, you may require more advanced calculation capabilities for multiple business lines, sales channels, revenue streams, or unique shipping requirements. If you're dealing with bundled packages or heavily regulated industries, you might need a solution that can accommodate these specific needs as well.

It is important to ensure the software you choose can accommodate all of your needs and the company providing the software has the ability to provide expertise and support to answer your questions as they arise.

4. Can my sales tax calculation software manage my sales tax filings?

Can the sales tax calculation software also file the sales tax returns? Some software solutions provide an “auto-file” capability that will file the sales tax returns. However, there is more to sales tax compliance than just filling out the right paperwork and paying the correct amount. A true filing and remittance compliance process requires expertise and human oversight to ensure that no errors are made and accounts for ongoing changes within your business and the ever-evolving sales and use tax landscape. You can’t get that from an automated solution only.

The entire process cannot be managed without someone going into the system and making appropriate updates and understanding when and why they need to be made. Also there needs to be a live person available to monitor mail and jurisdictional sites for communications and notices from state and local jurisdictions. So, if you’re looking for a full end-to-end compliance solution, you need to understand that automation is important but not the full solution.

If you’re looking to add a full end-to-end sales tax solution to your compliance processes, get in touch! With TaxConnex you get the best of technology and innovation combined with human expertise, oversight and dedicated support.