Sales Tax Automation Mistakes

By Robert Dumas on Thu, Nov 05, 2020 @ 11:00 AM

This article was written for the Atlanta Business Chronicle Leadership Trust. To see the original post, click here

Process Automation on the Mechanism of Metal Gears.If your business has an obligation to collect and remit sales tax, then you know how complex the process can be. Whether you manage it all internally, work with a CPA, or use an outsourced provider or technology, you know that there are many moving parts. Automating part or all of the sales tax process is sometimes necessary to maintain compliance. However, in my experience, sales tax automation can be counterproductive in certain situations.

Let’s first look at the overall sales tax process.

1. Determining your sales tax requirements.

This consists of knowing where you have sales tax nexus, understanding the taxability of your various products/services and recognizing whether there are any exemptions or reduced tax rates that apply to your business. Assuming you have a requirement to collect and remit sales tax, then you proceed to step two.

2. Applying sales tax to your invoice or to a transaction in your shopping cart.

Here you must consider multiple factors to determine the correct amount of sales tax to collect: in which jurisdiction does the sales tax apply? What is being sold, and therefore what is the taxability? What is the correct rate? Understanding these variables enables the proper calculation of sales tax.

3. Preparing and filing the sales tax returns.

In this step, you are registering for sales tax purposes with the various jurisdictions, preparing and filing returns, paying the jurisdictions, responding to jurisdictional questions/notices, etc.

There are additional nuances to each of the above, but these represent the key processes. Based on these three processes, sales tax automation is best leveraged in the second step, where you must calculate and charge the proper sales tax. Even in this step, automation has some potential drawbacks.

Let’s look at the drawbacks of automation in each step.

1. Understanding your sales tax requirements.

There’s not much argument that this process cannot be automated. There are too many nuances that must be reviewed and considered. Technology might be able to help you determine economic nexus based on bright-line distinctions as to what does and does not create nexus. But reviewing a potential physical presence is very fact-driven and nebulous. As a result, a sales tax professional is often leveraged in this initial planning process.

2. Applying sales tax to your invoice or to a transaction in your shopping cart.

While automation can be best leveraged in this process, you should be careful to not deploy the wrong type of automation. For example, do you really need a third-party sales tax calculation solution that plugs into your invoicing system or shopping cart? Or can you manage the calculation of tax within your existing systems?

This is a question of complexity. For example, a company selling tangible personal property (TPP), which is generally taxable, could leverage a simple tax rate solution rather than investing in a sales tax calculation software. The real value in a sales tax calculation software is twofold: first, the taxability rules of what is subject to sales tax where, and second, the proper tax rate for the specific jurisdiction. In the previous example, the company is selling TPP, which is generally taxable, and therefore a significant portion of the value of a sales tax calculation solution is not necessary. An accurate tax rate is all that is required.

Deciding whether sales tax calculation software is necessary depends on the complexity of a company’s products/services. And even with complex services (think SaaS companies), I would not advise subscribing to a fully automated “set it and forget it” methodology. This can be problematic because your nexus footprint will likely change, requiring you to update your sales tax calculation software. The introduction of new products will also require you to update or adjust the sales tax calculation software over time.

3. Preparing and filing the sales tax returns.

I see the most issues with automation in this portion of the overall process. There are some supposedly simple solutions that attempt to automate steps one and two but often fail here. They fail for the following reasons:

  • The nexus footprint changes, requiring the taxpayer to monitor nexus and determine if they should register in new jurisdictions. 

  • Filing frequencies change, requiring the taxpayer to update their filing calendar to account for these changes. 

  • Notices occur, requiring the taxpayer to log in to state websites and look for these notices that are now more and more frequently issued electronically. 

  • Certain transaction taxes occur that are not passed through on the customer invoice and are often not filed automatically - for example, the Ohio Commercial Activity Tax and certain business and occupations taxes. 

  • Questions arise in the business that require the taxpayer to research these items on their own. 

Each of the scenarios above requires human intervention and someone with sales tax knowledge to address each area. So while technology and automation can play a critical role in managing sales tax, it would be erroneous to assume that technology could fully automate the process. Choose wisely in what phase of the process you decide to automate.

If you have any questions or would just rather pass on the responsibility of sales tax to someone else, reach out. With TaxConnex, sales tax is all on us.

Robert Dumas

Written by Robert Dumas

Accountant, consultant and entrepreneur, Robert Dumas began his public accounting career on the tax staff at Arthur Young & Co., followed by a brief stint at Grant Thornton. In 1998, Robert founded Tax Partners, which became the largest sales tax compliance service bureau in the country, and later sold it to Thomson Corporation. Robert founded TaxConnex in 2011 on the principle that the sales tax industry needed more than automation to truly help clients, thus building within TaxConnex a proprietary platform and network of sales tax experts to truly take sales tax off client’s plates.