Sales tax assessment and automation can help organizations save time, money, and resources while working toward more accurate tax compliance. Any company that sells goods or services in a state with sales tax could benefit. Below are some considerations for when a sales tax assessment would be necessary, the methods of assessment, and how to choose the best automated software for your business.
When a Sales Tax Assessment Is Needed
Sales tax laws are complex and product taxability is diverse in each jurisdiction.
Consider a sales tax assessment if any of the following scenarios apply to your business in the following circumstances:
- Early stages of sales tax compliance journey
- Transitioning from manual filing to automation
- Changing enterprise resource planning (ERP) or point-of-sale (POS) systems
Sales tax assessment is often well-timed to when an organization first starts to explore its nexus footprint. Most processes developed in the early stage of a business’s growth can quickly go awry if the fundamental requirements aren’t accurately addressed.
As with most processes, bad data placed into the system results in bad data being pushed out by the system. This can lead to substantial tax exposure and a larger investment down the line to clean up a broken system. Combining a process that incorporates knowledge of the legal tax requirements coupled with knowledge of the system functionality is therefore vital.
Sales Tax Assessment Process
A sales tax process evaluation can provide an organization with a comprehensive view of the business’s options for sales tax compliance.
The evaluation includes an assessment of the following:
- Any existing sales tax compliance processes and systems
- Business’s products and services, as well as the jurisdictions in which products are sold and services performed
- Current business operations and any future expansion or exit plans
- Sales tax software selection
- Review of alternative options in the event an automated solution is not feasible or the desired approach
- Recommendation for current and future sales tax compliance processes and systems
- Discussion of applicable sales and use tax items potentially impacting business operations
Sales Tax Assessment Outcomes
A sales tax assessment involves a high-level evaluation of a company, offering recommendations for effective sales tax compliance management. It helps determine the benefits of the following sales tax approaches and suggests the most suitable options for your organization, whether they be handled manually, by outsourcing, or with automated software.
Manual
Developing an internal process for filing your sales tax returns manually may be time consuming, but it could also be cost effective. It’s useful when an automated solution isn’t feasible, as with businesses with fewer products or a smaller filing footprint. Manual filing could be the preferred option short-term, and an automated solution could be better in the future.
Outsourcing
Outsourcing your sales tax compliance could be the better option when limited staff resources rule out the manual or automated approach. Outsourcing can work in tandem with a software solution, where the software acts as the tax engine and the outsourced team compiles and files the tax returns.
Software
Sales tax software can help businesses selling a diverse array of products or services while operating in multiple jurisdictions with varying tax rates and rules.
Implementing sales tax software can streamline tax calculation and reporting processes, enhance accuracy and compliance, save time and resources, and position your business for growth in a dynamic regulatory landscape.
When considering utilizing a sales tax software, it’s important to evaluate the different providers and choose one based on what makes the most sense for the current and future state of your business.
How to Select Sales Tax Software
Choosing the right sales tax software is an essential component of sales tax assessment, and with a wealth of options available, selecting the right one for your organization can be challenging.
Sales Tax Software Considerations
There are four primary aspects to consider when searching for the correct software:
Scalability
Automated sales tax software should be able to efficiently scale with your business’s growth and increased complexity.
To track changing regulations and laws while streamlining your processes, look for a product that provides the following features:
- Accurate tax calculation based on the latest rates, rules, and exemptions for relevant jurisdictions
- Jurisdiction coverage for all the current and planned jurisdictions where your business operates
- Customizable system options to account for the application of tax rules to the new products and services sold
- Exemption management tools to support tax-exempt sales
- Nexus monitoring for businesses that need to track nexus obligations in multiple jurisdictions
- Robust reporting features to generate comprehensive tax reports for filing purposes and internal analysis
- Integration capability to seamlessly integrate data with existing systems
- Real-time updates for tax rate changes and regulatory updates
Accuracy
Sales tax software should reflect precise rates and product codes across multiple jurisdictions. Choose a solution with data validation abilities to confirm all information entered in the system is exact and current with the most recent regulations and laws applicable in your jurisdiction.
Cost
Sales tax software providers employ various pricing structures, including transaction-based charges, revenue-based models, and flat rates. When assessing the most suitable provider, it's crucial to analyze the components influencing the monthly pricing and their alignment with the business's needs.
Complexity
Invest in a product that considers tax application for each transaction and payment processing requests from various global locations.
Different types of products, like tangible goods versus services, can have varying application of tax depending on the type and where they are sold. E-commerce stores may need different rules than brick-and-mortar shops, for example.
If you have numerous sales channels dedicated to wholesale and retail, search for a solution that allows your organization to sync data between them or combine the systems together, so information flows smoothly without requiring manual interference every time there’s a change.
We’re Here to Help
If you have further questions about sales tax assessments and automation, reach out to your Moss Adams professional.
Additional Resources
Special thanks to Haleigh Lyon, Senior, State & Local Tax Services for their contributions to this article.