You’ve determined you have nexus and your products and/or services are taxable. Now how do you implement and actually charge sales tax? There are several ways to calculate and charge sales tax but many people lean towards letting a software handle it for them, but is this really the best solution for everyone?
There are numerous companies that provide sales tax calculation software. 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.
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 a sales tax calculation system. For example, if you’re selling tangible personal property (generally taxable) in a few jurisdictions where the tax rates are easily accessible then a sales tax calculation system is not necessary. However, if you are selling telecommunications services on a nationwide basis then a sales tax calculation system is a necessity.
In between these two examples, there is a bit of gray area where sales tax calculation software could still be useful but isn’t always necessary. Often companies selling tangible personal property (generally taxable) across the country may need to simply view and understand tax rates, load the tax rates into their invoicing/ERP system and let their invoicing/ERP system calculate the tax. This can work very effectively with minimal upfront or ongoing cost.
There are also instances where you may be able to manually calculate on your own. If the taxability of your product or service is pretty standard (doesn’t differ from state to state) and you’re only selling into a few states, it may make sense to purchase tax rates for the states you are selling into and manage it on your own.
Bottom line, a sales tax calculation system can be very beneficial in the right situation but may not be necessary and can be overkill for some companies. As with most sales & use tax topics, there is no cut and dry answer. If you need help managing the complexities of sales tax – we can help. Contact us to learn more about some of our sales tax calculation partners and how we can help manage your sales tax compliance.
Check out the newest addition to our video series - How to Charge Sales Tax