For most businesses, sales tax is not a top priority. It probably doesn’t even make the top 5 list! But if not managed correctly, it can cause major headaches. Understanding the various aspects of your sales tax process is critical to minimize your risk and to keep your business on solid ground as it relates to sales tax.
Now that we are three years post the Wayfair decision, and all states with a state-wide sales tax have enacted economic nexus laws, most businesses with a sales tax obligation have found a way to manage their sales tax, but how many are truly happy with how it’s going? Many went the “easy” route and turned to an automated solution to solve their full compliance obligation, only to realize that calculation and compliance were two different things. If you went down the automated path, your calculation is handled for the most part, but you’re left responsible for configuring the software, telling the software company how to manage the sales tax process, and addressing any changes or updates.
Clearly, sales tax calculation is only one piece of the puzzle. Let’s examine both sides.
Calculating your Tax
Do you even need a calculation tool?
There are two pieces of information required to calculate the applicable sales tax – (1) Tax rates; and (2) Taxability rules. These rates and rules can be managed perfectly fine in some situations without the need for sales tax calculation software. For example, if you’re selling tangible personal property (generally taxable) in a few jurisdictions where the tax rates are easily accessible, sales tax calculation software may not be necessary. One could simply maintain the data within your own systems or software. However, if you are selling telecommunications services, software or services on a nationwide basis, sales tax calculation software could be critical to your business.
If you decide that sales tax calculation software is the better option, there are numerous companies you may consider. 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.
Filing and Remittance
What’s next? Just the filing and remittance, right? Wrong!
Filing is just one piece of the puzzle, but maintaining a sales tax compliance process isn’t a once-a-month (or year) project. Whether you manage the process in-house, work with a technology vendor or outsource completely, there are many decisions and pieces to the process that need to be understood, including remitting payments, maintaining and updating your tax calendar, reviewing nexus, keeping up with notices, researching taxability rules, validating exemption certificates, and the list goes on.
Software options appear to automate these processes however, they don’t remove all the work from your plate. For example, you must tell the sales tax software company what to do and when to do it: implementation of the technology, maintenance of the business assumptions and rules applied by the technology, updates and management of the tax calendar and the changing filing frequencies, managing of sales thresholds and expanding nexus footprints, taxability of new products and services, and response to jurisdictional notices.
It’s important to understand the differences in calculating sales tax and maintaining your compliance. Many businesses get stuck working with a vendor that sells them a one-size-fits-all, “simple” solution but end up with a load of work still on their plate and no idea how to manage it. Calculation software can be a huge help in the sales tax compliance process but it’s just one of many pieces in the puzzle.
When you pair your tech solutions with an outsourced compliance partner, you’re able to make the most of valuable resources available to you and have a reliable compliance solution that actually takes the burden of sales tax off your plate. Contact TaxConnex to learn more about our services in sales tax compliance – from nexus reviews and audit management to maintaining your tax calendar and filing your returns.
Looking to learn more? Check out our eBook – Calculation vs Compliance: Two Different Aspects of Compliance.