How to Decrease Costs and Risk with Sales Tax Management Software

Published by Adam Bluemner on April 28th, 2015

No company wants to pay more than they have to in sales tax. On the other hand, pay less than required and you might really end up with some major expenses.

Accuracy matters when it comes to sales tax management. But achieving it can be harder than it seems on the surface. Every state and jurisdiction has their own, ever-changing rates. Additionally, taxability can also depend on who the customer is and what product or service is being sold.

Traditionally, any company serious about getting their sales tax management correct needed to invest significant time meeting all the relevant regulations. Jurisdictional rates, nexus determination, special product tax classes, exemption qualification, and a host of other complicated issues come into play.

Managing sales taxes is complex work. It’s an area where overhead administrative costs can pile up quickly. To keep that from happening, more and more companies are looking to the combination of software technology and outsourcing as a way to lower costs and eliminate risk.

An Interview with Jordan Grant of Avalara

Avalara is a leading sales tax automation provider. I spoke with Jordan Grant, the Strategic Alliance Manager at Avalara, to find out about sales tax challenges and how businesses can more easily overcome them.

What Kind of Business Might Be a Good Fit for Automating Sales Tax Management?

First, we should keep in mind that payroll used to be a manual process for businesses. Now, even very small businesses automate payroll. Sales tax is very similar - automating sales tax management is going to be a good idea for any business that deals with selling goods or services in more than one tax jurisdiction. The sales tax challenge is industry, location, and business size agnostic. Outsourcing sales tax, similar to outsourcing payroll, removes the complex compliance burden and increases business efficiencies in a way that allows companies to focus on their primary expertise, whatever it may be.

What’s the Problem With Managing Sales Tax Manually, Anyway?

If you’re managing sales tax manually, and you have business operations in more than one state, consider this: there are over 12,000 taxing jurisdictions in the US, and those rates can change on a quarterly, sometimes monthly, basis. Your business is responsible for paying the right rate to the right jurisdiction, so you’re also responsible for tracking the changes. From a manual perspective, this usually means uploading updated rate tables to your POS, ERP, or e-commerce system. A lot of people will keep that tax rate data in an Excel file. But it can almost become like a full time job to keep up with those rate changes. There were nearly 1000 tax rate, rule, and jurisdiction changes in the fourth quarter of 2014 alone. How confident are you that you caught them all? And would you bet your business on it in the event of an audit?

Sales Tax Jurisdiction Map
This map from Avalara shows the enormous number of different sales tax jurisdictions. To check out an interactive version of the map or explore automation of jurisdictional updates, click here.

The second thing most businesses don’t keep in mind when managing sales tax manually is product taxability. And truly, there is no rhyme or reason behind product taxability. It is incredibly difficult to track manually and arrive at the correct rate. In the state of New York, for example, you can buy a whole bagel tax free. But, buy that same bagel with cream cheese on it and have it cut in half before leaving the store, and you’ll be charged sales tax. Another good example is apples. In the eyes of state tax authorities, not all apples are created equal. They can be taxed one way when considered candy, another way when considered pie, and yet another way when considered a beverage. Once again, the responsibility of managing product taxability accurately falls on the business making the sale.

Finally, some businesses will need to think about managing sales tax exemption certificates. Manufacturers, distributors, and wholesalers may think they don’t have a sales tax problem because they only deal in exempt sales. But those businesses need to remember that they’re dealing with partial exemptions, full exemptions, exemptions based on usage - and honestly, who can keep track of what’s what? Most businesses know that certificate management is more than throwing a piece of paper in a filing cabinet, but when it comes to having an effective process for managing certificates, they’re stumped. They need a better way to track expirations, keep current certificates, and have them organized in a way that means easy and fast access for an auditor.

Do Companies Know How Much Sales Tax Management Is Really Costing Them in Terms of the True Business Cost?

The true business cost to managing compliance is not something most business owners take the time to examine - they have bigger fish to fry. So Wakefield Research looked into it for them. Wakefield conducted a study that looked at how much time on average companies were spending filing and remitting sales taxes - 11 hours per week. And that was just filing and remitting.

The study also found that the average cost to managing an audit was $96,552. And sales tax rate determinations is often where auditors start. If they find errors or miscalculations in sales tax rates, they have the evidence the need to warrant full access to the businesses’ books.

[Editor’s note: The study surveyed 400 US-based finance and accounting professionals from companies with $1M+ in annual sales revenue. Read the full report here.]

So How Does Automation Work?

Avalara is one of the few companies offering sales tax automation in the marketplace. Our software works within a customer’s own financial, billing, e-commerce, or point of sale system to deliver cloud-based sales tax determination, exemption certificate management, and tax return preparation, filing and remittance.

The process of applying sales tax via payment is seamless and occurs behind the scenes, so to speak. When a transaction is initiated, a data call is made from the originating software (your POS or ERP system, for example) to Avalara’s cloud-based service. The actual ship-to address gets converted to a precise longitude/latitude, providing pinpoint rooftop accuracy to determine the relevant jurisdictional rates. Each line item is also analyzed to ensure the relevant product or service rate is applied. Ultimately, the correct composite tax rate is returned and applied within the payment software automatically. This all happens within 1 second.

At the moment, Avalara offers integration with hundreds of pre-built connectors, including most major ERP systems, accounting packages, e-commerce shopping carts, as well as POS systems and mobile platforms. We currently serve tens of thousands of businesses in over 100 countries worldwide–everything from the mom-and-pop store front to the Fortune 500 business.

[Editor’s note: Check out a two-minute video to see how Avalara works.]

For more insightful commentary on topics related to sales tax management, don’t forget to check out Avalara’s Twitter channel.

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