What was new in December for state sales and use taxes
There’s always something changing in the world of tax, especially sales tax. Here’s a review of...
Sales tax compliance involves a highly complex set of rules and regulations. These rules change frequently in many jurisdictions, and the question of whether (and how) your company needs to collect and remit sales tax to a certain jurisdiction can be quite difficult to determine.
Many companies believe that going with a sales tax automation option like Avalara. However, relying only on automated software to determine and manage your sales tax obligations could come at a risk. Automation flaws can lead to missed sales tax payments, penalties, and possible legal action.
Software like Avalara’s Avatax serves an important purpose in the compliance process. Businesses need a way to calculate the correct sales tax to charge in states where they have a sales tax obligation. However, relying on the software to manage everything outside of the sales tax calculation is where there are potential mistakes.
TaxConnex leverages technology but relies on human expertise to deliver its sales tax compliance solution services. The company recognizes that there is no such thing as a one-size-fits-all answer to sales tax compliance. There are nuances, risk tolerances, changing invoicing systems, new e-commerce platforms, new product launches, etc. that all lead to a very dynamic sales tax compliance obligation that needs to be managed by people - not bots.
Sales tax rates and taxability rules differ by state and often at the jurisdiction level as well. By utilizing software that has the rates and taxability rules built-in you can simplify the process of ensuring you charge the right amount of sales tax associated with each purchase. 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 less critical. It becomes more complex if you are selling online, or selling software or services to customers in multiple locations. In these situations, it makes sense to utilize a sales tax calculation software.
Most sales tax calculation software today is SaaS-based (Software-as-a-Service). These tools often integrate with a company’s invoicing system and work in tandem. When an invoice is created, or when a transaction is entered in a shopping cart on an e-commerce site, the invoicing/e-comm site will pass certain information to the sales tax calculation software. These data elements include the customer’s location, the dollar amount of the sale, and the product or service sold. Based on these data elements, the sales tax calculation software will determine if sales tax is applicable and at what rate. It will then calculate the sales tax due and return this to the invoicing/e-comm site for presentation on the invoice or the web page.
On the surface, it may seem to make sense that if you are utilizing sales tax calculation software that you could also utilize the same company for the rest of the compliance process. This includes determining sales tax nexus, registering in correct states, managing a tax calendar, responding to notices, correctly filing and remitting returns and more. Software can manage some of this, but there are often significant gaps in the process if you rely on a sales tax automation software solution.
Automated systems are most effective when the rules and the processes to follow are clear cut. However, this is seldom the case with sales tax compliance. Consider nexus determination as an example. An automated solution will do a fine job of tracking sales activity and whether you are approaching certain economic nexus thresholds. However, in order to make a full determination of nexus the automated solution will need to account for ALL of your sales which might include sales via Amazon or eBay or other platforms that are not running through your automated solution. Furthermore, there is no way to account for the physical presence standards of traveling into states to solicit business or perform services. Relying on an automated solution can lead to sales tax missteps and heavy penalties in the future.
Having a computer program determine whether your company has a sales tax obligation in a state or jurisdiction could be fraught with errors. Without personal verification of business activities occurring in every zip code in every state, this software has a serious blind spot. It may be possible to program the software correctly, but, there are many nuances to establishing nexus, such as employee location, inventory storage, sales into new states and jurisdictions, new product launches or sales meetings or tradeshow participation. Can all of that really be tracked accurately without someone manually inputting data? If not, this could lead to sales tax missteps and heavy penalties in the future.
Preparing and filing sales tax returns can be another problematic step for an automated solution. One of the biggest cons is that an automated system struggles to manage sales tax credits. Most businesses operate on an accrual basis. For sales tax purposes, this means that when you charge sales tax on an invoice, you are required to remit the sales tax whether you have actually collected cash from the customer or not. Situations will occur when a customer returns an item or provides you an exemption certificate after you have charged and remitted the sales tax. You have now overstated your sales tax due with the jurisdiction(s). An automated solution 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 in order to offset the credit with current period tax. A professional tax preparer could potentially move this tax to a different jurisdiction and offset the tax against current period taxes and ultimately improve cash flow.
Another tricky aspect of filing state and local sales tax returns is keeping up with notices and the changes associated with filing frequencies and filing/payment methodologies. States often post notices in a business’s online e-file account. An automated solution cannot capture these notices and respond to them. A person must see the notice and take specific action to resolve it. With an automated solution, the business will need to identify this notice and upload it to a centralized customer support center and hope that someone takes action to respond to and resolve the notice. What if the notice references a change in filing frequency from quarterly to monthly? The business is required to update the automated solution, else they are responsible for the missed filings for failure to file monthly rather than quarterly. A dedicated financial professional who is tasked with checking these notifications will do a better job of ensuring that your obligations are met and take more pressure off of the business.
Sales tax software on its own may seem like a workable solution. However, as illustrated above, there are gaps that you need to account for in using an automated solution. In using one of these automated solutions, you will need to assign a staff member to act as your in-house sales tax manager. Ideally, this in-house resource will need to be knowledgeable in sales tax in order to close the gaps the automated solution cannot. While you might think you are outsourcing the sales tax compliance process when you use an automated solution, you are not. And when you have to have someone on staff with that amount of knowledge and skill to manage software you are paying for, is it really worth it? Simple software solutions may look like a good deal on the surface, and are often chosen because of their cost savings, but they can open a company up to the possibility of liability, risk and penalties if not managed closely. It is important to understand that a “set it and forget it” mentality with automation can lead to errors and failed returns. If you work with a specialist like TaxConnex, you can relax and let our experts handle all of your sales tax needs.
Even if you have used a sales tax software solution in the past, you may have experienced some of these mistakes and issues and be reconsidering your decision. A software system simply cannot keep up with the ever-shifting patchwork of sales and use tax, or give the hands-on support that is needed to keep up with the on-going maintenance and care of sales tax filings. Trusting your sales tax future to TaxConnex will bring you peace of mind and ensure that you are complying with all state and local regulations.
If you have used sales tax automation software in hopes of maintaining your entire compliance process but have been disappointed with the results, it might be time to upgrade to a better, service-oriented solution to remedy your sales tax issues. Leave the calculation to the software and turn to someone who has the service and expertise available to help you stay in compliance. Contact TaxConnex at 877-893-5804 to learn more.