How Does the Software Industry Feel About Sales and Use Tax?

This blog was last updated on September 5, 2023

The U.S. software industry is no stranger to evolving technology. But what about sales tax compliance? Can this segment keep pace with ever-changing regulations, while still meeting customer needs? Sovos and SG Analytics conducted a survey to better understand how software organizations are planning to improve sales tax management.

Overall, 43% of respondents said they wanted to focus on improving internal processes to streamline tax preparation, filing and remittance. Improving tax accuracy as it relates to rates/rules and applying exemptions (38%) and improving operational efficiency by consolidating business systems (34%) were also top priorities, the survey found.

We spend too much time on compliance

Two-thirds of enterprise organizations said they spend approximately one full work week on compliance, including data consolidation, return preparation and filing, with 69% of mid-market organizations saying the same. Over half (56%) of companies making under $50 million annually reported that filing/remittance was one of their most time-consuming sales and use tax activities.

Additionally, preparing for audits also takes up more of employees’ time. Audit-specific processes account for 29% of total monthly working hours across IT teams and 25% across finance/accounting teams. Additionally, 41% of software organizations said they have paid an annual audit penalty of $160,000 in the last 12 months.

Pro tip: Automating even just one piece of your compliance process can free up time for your employees.

We need to accelerate data aggregation

Across all business sizes, 44% of respondents said the lack of a tightly integrated single tax software (i.e., subscription billing, ecommerce, accounting) was their top technological challenge. For mid-size organizations, 42% reported that consolidating sales tax data from disparate channels was one of their most time-consuming activities. Furthermore, all respondents said aggregating tax information from multiple transactional channels was a top sales and use tax challenge.

• 35% of respondents would like to see centralized management of tax calculations and information as an improvement on the roadmap.

Pro tip: Integrating a tax engine with your ERP system can reduce the risk of manual errors and allow for seamless flow of tax information across systems.

We should invest in scalable, cloud-based technology

Even with increasing compliance challenges, 76% of respondents said they are planning to invest in new sales tax technology within the next two years. Furthermore, 83% of respondents plan to migrate to cloud-based solutions in the next 24 months, aiming to achieve:

• A faster automated data feed and database conversion
• An enhanced collaboration between departments
• Flexible modification and license revision processing.

Over half (53%) of respondents said that cloud solutions improve sales and use tax calculation and compliance-based operational efficiencies. The majority of respondents with cloud-based solutions (84%) also said they are extremely and highly satisfied with their current systems.

Opting for scalable sales and use tax solutions with flexible deployment options and data security features can help software companies maintain compliance without overburdening employees. This can help ensure the organization can focus on growing the business and maintaining customer satisfaction.

• 47% stated that part of their sales and use tax compliance enhancement roadmap included gaining the ability to maintain compliance as the company grows and expands.

Pro tip: Embracing cloud-based solutions supports overall business transformation and allows for more system flexibility, also reducing the burden on IT.