You operate a lean tax compliance and reporting team. Maybe your company has reduced staff over the past 5-10 years while continuing to grow its business through organic means as well as merger and acquisition.
But now your staff of 10 is down to four or five. What was once a manageable manual process of pulling data from ERP into an Excel Worksheet, doing your pivot tables, and then filling out returns on all the different state websites is now an impossible task due to additional nexus obligations from the Wayfair decision. And then there’s the hassle of keeping up with the state, city, and county sales tax rates and getting them into your ERP system on time.
What are the benefits of sales tax automation software and how do you determine the best deployment method?
Sales tax automation benefits for your business
- Operational efficiency – One benefit of moving to tax automation is the amount of time your team can save in terms of training and research. Imagine trying to understand the tax obligations of a sister company or one-off division outside of headquarters using a different system, or tracking and ensuring they are filing accurately. Eliminating manual processes also reduces the chance of errors and penalties. Reducing reliance on spreadsheets alone will increase efficiency.
- Business enablement and ease of maintenance – Tax automation brings with it more flexibility and control in adapting to business changes. Geographic expansion, merger, and acquisition, or selling a new product or service can be managed more quickly and easily by enabling the changes, and embedding the process controls in the tax automation system.
- Audit trail – An audit trail provides you the ability to quickly find and share the details of your sales transactions with internal and external auditors in a format that is legible, easily understandable and consistent.
- Data visibility – Better control and insight into your data (where you sold a product or service and to whom) helps the company focus on planning. Also knowing where your tax liabilities are, where you are overpaying, or even IF you’re paying tax, provides an opportunity to enhance reporting and insights into the C-level.
- Strategic activities – Tax automation also frees up time spent on mundane tasks to work on more strategic decisions with value-added activities.
Sales tax automation – deployment options
- Batch tax determination – In a batch process, you collect your orders during the day and run them against the tax engine at night with a file transfer rather than connecting to a real-time system. It can be used in conjunction with your AR and AP solutions, with managed services options, and can be less expensive to implement than using a real-time approach. Also, using a batch tax determination approach provides the option to validate the tax your vendors are charging on your invoices and accrue if needed. However, one must be careful that nexus profiles are kept up to date to ensure correct tax rates are applied.
- Real-time tax determination – In a real-time tax determination scenario, tax is calculated as an order is taken and invoices are received.
A couple of different tax automation options include:
- Embedded tax determination using ERP – In this scenario, you’re using embedded modules such as your POS, ERP system, a financial application and/or ecommerce system to manage tax determination. Tax rates, rules and unique logic required for your special business needs must be loaded into the system and maintained by the user. Often, IT resources, an ERP and ecommerce site expert are required. Utilizing these systems also requires a lot of in-house maintenance.
- Third-party, external tax determination engine – In a third-party tax determination scenario, your POS system, ERP system, financial application and/or ecommerce system are connected directly to the tax determination engine and feed transactional data in real-time to the tax engine. Here the tax engine determines taxability based on jurisdictional tax rates, where the product or service is being used, if any exemptions apply, or special rules such as reduced or increased rates. The data, if then stored in an audit or transaction file, enables you to run a variety of reports on all the transaction-related data in the system for AP, AR or both.
Other sales tax automation deployment considerations
There are many deployment options to consider:
- Whether to host the tax determination engine yourself, via on-premise, which requires you to keep your tax engine rates and rules up to date yourself, and increases your cost of server maintenance.
- Deploy in a private cloud, which still requires you to keep the tax engine up to date.
- Work with a SaaS tax compliance vendor, which will enable you to offload your operational burden.
Other factors to consider:
If managing multiple ERPs, do you want to consolidate into one source of truth or maintain each as an independent operating unit? Tax determination is only part of tax compliance. You may also have challenges manually managing your customer exemption certificates or filing state tax returns. There is software automation to help you manage those processes as well, including managed services offerings to let a vendor do it for you.
View an on-demand webinar from the Knowledge Group with experts from Sovos, KPMG and the Multistate Tax Commission as they shared ways to ensure compliance with tax laws and minimize audit risks with sales tax automation. CPE credits are available.