Sales Tax Scaries 6: Relying on Automation

When Automation Turns into a Compliance Nightmare

Robots run amok in many horror movies – and relying too heavily on automation can make your sales tax compliance a similar nightmare. 

Relying on automation can leave you with a lot left to do for compliance: tax calendar updates, keeping up with changes in your company nexus and product taxability outside of your sales engine, registering as required in new states, keeping up with which states take paper versus digital filings, keeping up with tax jurisdictions’ notices and correspondence, and on and on. 

The promise of automation is hands-off, easy compliance, but in truth software alone can’t fully manage your risk in the sale tax world. 

Needed but Incomplete: Why Automation Isn’t Enough for Sales Tax

As your businesses grows across multiple states, the need for sales tax automation becomes clearer. But it’s equally important to know where the automation’s benefits run out. 

Sales tax compliance starts with accurately calculating and charging the right tax on each transaction. With thousands of tax jurisdictions in the U.S., this is where automation shines, keeping you on top of ever-changing rates and taxability rules that vary by state, county, city and product or service type. 

Most sales tax calculation software is cloud-based (SaaS) and integrates directly with your invoicing, ecommerce or ERP systems. When a customer makes a purchase or an invoice is created, the software uses data such as customer location, transaction amount, and product type, to determine taxability, apply the correct tax rate, calculate sales tax return the tax amount to be shown on the invoice or website. 

Where Automation Falls Short in Sales Tax Compliance

Our recent survey of financial pros across a variety of industries show that 84% who use software, either solely or paired with an in-house team, report that their software partner does not handle the entire sales tax process. More than 40% say their partner does not handle the tax calendar, their notice management and resolution nor exemption certificate management. 

Automation’s shortfalls, the survey added, especially included monitoring transaction thresholds, responding to state tax notices and making adjustments for late exemptions or customer credits. 

Tax automation software is a valuable tool. Things get spooky, though, over the several parts of sales and use tax compliance that still require human oversight and expertise. For example: 

The Human Element: Where Sales Tax Automation Can’t Keep Up

• Automation won’t automatically detect when you’ve established economic or physical nexus in a new state. If your business expands, hires remote employees or surpasses sales thresholds, someone needs to manually review and update your compliance footprint given economic or physical nexus.
  
  
• As your tax liability grows, one or more of your filing frequencies may change (e.g., from quarterly to monthly). Automated tools don’t always catch this, leaving you vulnerable to missed deadlines.
  
  
• Tax notices often arrive by snail mail or are posted in state e-file systems. These important docs can include audit requests, late payment alerts or rate changes – details you must know to stay compliant. Software alone won’t monitor or respond to these important communications. If you are filing quarterly and aren’t checking your state inbox regularly you could receive a change in filing frequency and be inadvertently (which likely won’t matter to the state) several months behind and the sales tax compliance by the time you check the inbox again for your quarterly filing.

Staying Ahead: Managing Filings, Credits, and Refunds Manually

Once you’ve collected sales tax, you’re responsible for reporting and remitting it to the appropriate jurisdictions. That process starts with sales tax registration, and it continues with maintaining a tax calendar that helps you manage your monthly, quarterly, or semi-annual tax reporting and remittance obligations. But with dozens of due dates across jurisdictions, it’s easy to miss something, especially with an outdated or inaccurate calendar – one area where automation often falls down.

Customer credits and refunds are a major challenge for automation. Let’s say you collect sales tax on an invoice, remit it and later the customer returns the item or sends an exemption certificate after the deal. Most sales tax automation systems seem ill equipped to deal with this scenario. 

The Bottom Line: Automation Helps, But Expertise Secures Compliance

Automation plays an important role in sales tax compliance, but it’s no substitute for expertise. To stay compliant and minimize risk, businesses need a clear sales tax strategy, ongoing nexus and taxability reviews and support to manage evolving tax laws and edge cases. 

Want to learn more? Watch our on-demand webinar “Don’t Test Your Luck: The Pitfalls of Sales Tax Compliance.” 

TaxConnex helps businesses like yours maintain compliance no matter what a spooky sales tax world throws at them. Get in touch with us today.