Choosing the right sales tax calculator for your business

If your business is creating sales tax obligations in your home state or in states nationwide – selling enough in a year, say, to create economic nexus – you better start looking at best options to calculate that tax.

One is calculation software, but how does that work? Do you need to download rates, or do you need a software to calculate rates immediately? What can this software do and what can’t it do?

The answer often depends on the details of your business.

Basic questions

When you add new products, expand into new states or change sales platforms, your sales tax obligations change. Managing sales tax obligations takes time, attention and resources, and it can fall through the cracks due to insufficient resources in even otherwise-efficient companies. Our latest annual survey of top finance executives, for instance, revealed that almost half of respondents (48%) aren’t fully satisfied with how their business handles sales tax. (Most still rely, fully or partially, on internal staff for sales tax compliance, opening the door to problems created by lack of oversight and lapses due to staff turnover.)

Sales tax calculation software determines rates according to factors such as

location (generally the customer’s delivery or billing address to identify the applicable tax rate) and taxability rules that pinpoint which of your products or services are taxable at what rate given state laws.

Good software also updates frequently – sales tax laws change fast – and integrates with your POS systems and sales software to generate invoices with accurate sales tax and to maintain an accurate G/L (not to mention sales tax records should an state auditor ever show up).

The easy (or at least initial) route for many companies is buying software that claims to automate the whole sales tax process, including the calculations and the compliance aspect of preparing and filing sales tax returns. You, however, often must configure that software and tell the software company how to manage the process for your company.

For example, we mentioned location and taxability. States like California and Texas have not only their state rate but hundreds or thousands of local ones, too. In some such states, filing a single return handles all your sales tax responsibilities in that state; but in other complex states, a single return doesn’t.

And most states follow destination-based sourcing rules, where you apply the sales tax rules and rates based on the destination of where you’re shipping the product. But some states are origin-based, meaning the sales tax rate of where you ship from is used. Even if you don’t know the difference between destination or origin states, your calculation software needs to if you sell large volumes into each of these kinds of state.

What do you sell, and to whom? Exemptions to taxability exist in many states on such items as groceries, tech and digital and clothing, to name only a few. Sales to nonprofits, schools, governments and for resale are generally exempt from sales tax, though the exemptions are far from uniform across all states? Are these among your buyers? Services are also generally exempt, though they’re rapidly becoming taxable in a growing number of states. If you sell services online, is the calculation software up to date on this?

Among other points, can your software account for:

Your physical nexus. This long-standing type of nexus has held that you have a sales tax responsibility in a jurisdiction if you have an office or similar brick-an-mortar presence there. Physical nexus, though, can now also be created by sales reps, service personnel, remote workers or warehoused inventory in – or even just passing through – a jurisdiction. Is your software up to date on the latest physical activities of your company?

Your sales through marketplace facilitators. These businesses or organizations (think Amazon or eBay) contract with third parties like your company to sell your goods and services on their platform. In most cases, they now collect sales tax from buyers and remit it to the appropriate jurisdiction for you – but you have a separate obligation if you sell on your own website in a state as well. States’ definitions of a marketplace facilitator also vary greatly as more states add facilitator laws. If this scenario applies to you, your calculation software needs to be constantly on top of this.

‘Calculation’ just the start

Calculating sales tax differs from maintaining your compliance. Does your company have the internal resources to handle the many details of compliance, or do you need a “calculation” software that will also handle it? Are your online sales limited enough so you could simply download relatively few sales tax rates and do the calculation internally? Or is there more to your particular compliance process?

(Our survey showed that more than four out of five finance pros using software to manage sales tax reports said their software does not handle the entire sales tax process.)

But here are some questions to ask regarding software and your company’s operations:

• Are you selling in too many jurisdictions with too many different rates and taxability rules to feel comfortable with your compliance?
• Most sales tax calculation software integrates with a company’s invoicing or ERP system; can a given software perform this integration with your processes?
• Can the calculation software file your sales tax returns and keep up with jurisdictions’ frequent changes in law?

Like all automated systems, calculation tools work best with rules that are static and clear – qualities rarely found in sales tax compliance. Much goes in to fitting this software with your company.

Contact with TaxConnex to learn more about our services in sales tax compliance – from nexus reviews and audit management to our calculation solutions. Your company’s sales tax obligations are easier when they’re all on us.