Automation's place in sales tax compliance

AI and automation are all the rage, but does it have a place in your sales tax compliance process? If so, where?

For many businesses, software and automation can serve an important purpose in the compliance process. Businesses need a way to calculate the correct sales tax to charge in states where they have a sales tax obligation, and for this, automation can be a great solution.

Sales tax rates and taxability rules differ by state and even locality. Software that has the rates and taxability rules built-in helps make sure you charge the right sales tax with each purchase. Most sales tax calculation software today is SaaS-based (Software-as-a-Service), which often integrates with a company’s invoicing system. When an invoice is created or a transaction entered in a shopping cart on an e-commerce site, the site will pass certain information to the sales tax calculation software: the customer’s location, the dollar amount of the sale, the product or service sold, etc.

Based on these elements, the software determines if sales tax is applicable and at what rate, calculates the sales tax and returns this for presentation on the invoice or the web page. And when you are selling multiple solutions across the country, an automated system can be a huge help.

Where does automated tax compliance fall short?

Other aspects of sales tax compliance present a significant number of issues that automation alone cannot fully solve. Just a few examples include:

• Tracking your changing nexus footprint. Automated solutions can’t track your physical presence without someone adjusting settings. 
• Updating your filing frequencies for when your sales tax returns are due. 
• Tracking, managing, and resolving notices that arrive via the US mail or posted in the states’ e-file sites. 
• Reporting taxes that aren’t calculated within the sales tax automation solution and not added to an invoice such as Washington Business and Occupations tax or the Ohio Commercial Activities Tax. 
• Addressing sales tax questions that pop up from within the business that you must research.

Another major concern that tax compliance automation struggles with is related to customer credits. Most businesses operate on an accrual basis, meaning that when you charge sales tax on an invoice, you are required to remit the sales tax, whether you have collected the tax from the customer or not. Situations will occur when a customer returns an item or provides an exemption certificate after you have charged and remitted the sales tax. You have now overstated your sales tax due within a jurisdiction.

What should you do? File an amended return? Use the credit to offset future liabilities? If you choose to absorb the credit by offsetting against future liabilities, be aware that automated solutions will hold that tax in the exact jurisdiction in which the original tax was charged and wait until there is a new transaction with tax in the exact same jurisdiction to offset the credit with current period tax. It might not sound like an issue, but if you sell more expensive items with significant sales tax due and you have fewer of these transactions, it can sometimes be months or years or never before you have another sizable transaction in the exact same jurisdiction. Eventually, your opportunity to realize these credits will expire due to the statute of limitations.

These scenarios need human oversight – and often someone with sales tax expertise to manage. This is something not usually available within a software and if you don’t already have someone within your team managing the software with this expertise, you could have a real issue.

In our recent survey of finance professionals, the respondents who utilize software say that these aspects of the sales tax process are not handled by software:

(Q: What aspects of your compliance process are not managed by your provider?)

The benefit of automated tax compliance is supposed to be that it is done for you, but software alone isn’t always enough to get sales tax off your plate entirely or correctly.

If you have other business activities and don’t have enough time to manage sales tax by yourself, you may want to consider outsourcing the sales tax compliance process to a provider who combines automated sales tax compliance software with expertise and dedicated oversight.

Sales tax compliance can seem overwhelming if you don’t have experience in this area, and it doesn’t seem to be getting easier any time soon. There are many paths to take to sales tax compliance, but ensuring you have a set path is pivotal in ensuring you don’t end up with years of exposure built up and get caught in an audit that leads to hefty penalties and fees. Regardless of the path you choose, you will be on your way to managing your sales tax risk prospectively.  When in doubt, reach out to a sales tax expert who can guide you throughout the process.