Pitfalls of Sales Tax Compliance: Billing Systems

Sales tax compliance might not be top of mind for most executives, but it's something nearly every business must manage. Regardless of your company’s size, if you're selling a taxable product or service and have nexus in one or more states or jurisdictions, you have a sales tax obligation.

And as tax laws and rules continue to evolve across the U.S., staying informed is critical. But where do you start?

Let’s begin with your billing system; the first line of defense in avoiding sales tax mistakes.

Definitions and Decisions in Your Billing System

Your billing system is the core engine for sales tax calculation and collection. It determines whether your customers are charged the correct sales tax based on product taxability and jurisdiction.

But here’s the problem: We often see major disconnects between a company’s billing system and its actual tax reporting.

For example, your system may be calculating and collecting sales tax, but:

• You haven’t filed a single sales tax return
• You haven’t tracked collected tax data
• You’re unaware that you’ve triggered a filing obligation

Other issues arise with how your products or services are defined and taxed.

Taxability and Product Definitions

Start by reviewing what you sell. Are your products or services taxable in a given state? Are those items integrated into the billing system properly so the correct tax decision is being made?

Make sure you’ve clearly defined each taxable item. One product may be described differently by billing, sales, and engineering teams. These variations can lead to misclassification and incorrect tax treatment.

Remember: Tax definitions last for years if left unchecked. Many businesses fail to regularly review the accuracy of these definitions in their billing platforms.

Nexus: More Than Just Economic Thresholds

Once your products are properly mapped, the next key factor is nexus—your legal obligation to collect and remit sales tax in a particular jurisdiction.

Most companies now understand economic nexus (based on the 2018 Wayfair decision), but many still overlook physical presence nexus, which is still applicable in many states.

Business changes—such as launching new products, expanding into new markets, or hiring remote staff—can alter your nexus footprint. Your billing system should be updated at least quarterly to reflect:

• Nexus map changes
• Product and service taxability
• Sales tax rates and rules

Disconnects Between Billing and Returns

A major pitfall we see is the disconnect between billing systems and return filing processes. Common problems include:

• Tax calculation overrides that miss local-level tax rates
• Failure to apply local taxes in home rule states like Colorado and Louisiana
• Charging and remitting tax where a credit is available but not claimed
• Over- or under-collecting tax due to outdated rules in the system

These issues can compound over time, especially if billing decisions are made in isolation from your sales tax compliance team.

Why Your Billing System Matters

Your billing system plays a critical role in:

• Identifying taxable products or services
• Determining nexus and proper jurisdiction mapping
• Calculating accurate tax amounts
• Integrating with your return filing calendar and systems

It’s not a “set it and forget it” tool. Ongoing oversight is essential to keep up with changing tax laws, product definitions, and jurisdictional requirements.

What’s Next?

In upcoming blogs, we’ll cover other key sales tax compliance pitfalls, including tax calendars, G/L (general ledger) management, and the submission of returns.

Want to dig in deeper today? Watch our on-demand webinar:
Don’t Test Your Luck: The Pitfalls of Sales Tax Compliance.

Stay Ahead of Sales Tax Challenges

TaxConnex helps businesses stay compliant with sales tax regulations through expert billing system reviews and ongoing support. If your billing process isn’t synced with your tax compliance strategy, Get in touch today to find out how we can help.