Sales tax is a major obligation for your business. As with most such obligations, you probably ask, “Can automation help me?”
In some ways, yes. Sales tax rates and taxability rules differ by state and even locality. Software that has the rates and taxability rules built-in helps make sure you charge the right sales tax with each purchase. Most sales tax calculation software today is SaaS-based (Software-as-a-Service), which often integrates with a company’s invoicing system. When an invoice is created or a transaction entered in a shopping cart on an e-commerce site, the site will pass certain information to the sales tax calculation software: the customer’s location, the dollar amount of the sale, the product or service sold, etc.
Based on these elements, the software determines if sales tax is applicable and at what rate, calculates the sales tax and returns this for presentation on the invoice or the web page.
For those selling tangible personal property in one location, out of a physical store for example, this can be a simple determination and one where additional software is not needed. Selling online where buyers can be located anywhere complicates the whole scenario.
Sales tax calculation software does make sense. But sales tax automation can be a nightmare if done wrong – and in many situations you might not realize anything scary is going on until it’s too late.
The overall process
Looking at sales tax somewhat simplistically, there are three primary aspects of managing your sales tax responsibilities.
Determine your sales tax requirements. This tells you where you have sales tax nexus, what the taxability of your various products/services is and whether there are any exemptions or reduced tax rates that apply to your business.
Applying sales tax. During this step, you are calculating the sales tax due based on the jurisdiction, what’s being sold, and who the customer is. Automation is most valuable in this step.
Preparing and filing the sales tax returns. Here you register for sales tax purposes with various jurisdictions, prepare and file returns, pay the jurisdictions, and respond to jurisdictional questions and notices.
What are the drawbacks of automation in each step?
Understanding your sales tax requirements. Technology and automation can help determine where you have crossed certain economic nexus thresholds. However, be cautioned if you have sales through other channels which might include sales via Amazon or eBay or other platforms that aren’t run through your automated solution.
Furthermore, sales tax automation software leaves a serious blind spot with the many nuances to establishing nexus including employees’ locations, physical offices, inventory storage, traveling into a state for sales or service, and exhibiting at tradeshows.
Applying sales tax to your invoice or to a transaction in your shopping cart. Be careful to deploy the right automation. 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 with your existing systems? Generally speaking, this is the step in which sales tax automation can provide the biggest “bang for the buck”.
Preparing and filing the sales tax returns. This portion of the process presents a significant number of issues that automation cannot solve. Tracking your changing nexus footprint. Updating your filing frequencies for when your sales tax returns are due. Tracking, managing, and resolving notices that arrive via the US mail or posted in the states’ e-file sites.a Reporting taxes that aren’t calculated within the sales tax automation solution and not added to an invoice such as Washinton Business and Occupations tax or the Ohio Commercial Activities Tax. Addressing sales tax questions that pop up from within the business that you must research.
Another major concern that automation struggles with is related to customer credits. Most businesses operate on an accrual basis, meaning for sales tax purposes that when you charge sales tax on an invoice, you are required to remit the sales tax whether you have collected the tax from the customer or not. Situations will occur when a customer returns an item or provides an exemption certificate after you have charged and remitted the sales tax. You have now overstated your sales tax due with a jurisdiction. What should you do? File an amended return? Use the credit to offset future liabilities? If you choose to absorb the credit by offsetting against future liabilities, be aware that automated solutions will hold that tax in the exact jurisdiction in which the original tax was charged and wait until there is a new transaction with tax in the exact same jurisdiction to offset the credit with current period tax. Doesn’t sound like an issue, but if you sell more expensive items with significant sales tax due, and you have a fewer number of these transactions, it can sometimes be months or years or never before you have another sizable transaction in the exact same jurisdiction. Eventually, your opportunity to realize these credits will expire due to the statute of limitations.
These potentially scary scenarios need human intervention – someone with sales tax knowledge to address each area. Technology and automation can play a critical role in managing sales tax, but relying on full automation can be a horror story waiting to happen.
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.