There’s no doubt that sales tax is complex, especially if you are doing business in various states and jurisdictions. Naturally, one would like to simplify the process of staying compliant across the board. So many people turn to automation, hoping to “set-it-and-forget-it” and carry on with their lives without being bogged down by the stress of sales tax compliance...
While that would be a quintessential scenario, automated solutions can make mistakes that end up costing your business money if not paired with the proper sales tax professionals.
Let’s start out by stating the obvious; automating parts of the sales tax process can be necessary to maintain compliance. However, automated systems are most effective when the process to follow is clear-cut. Unfortunately, the sales tax process is seldom clear-cut and is typically ambiguous and nuanced.
In many situations, sales tax automation can be counterproductive. To understand more, let’s lay out the sales tax process and how automation can or cannot be applied.
Automation in the Sales Tax Process
1. Determining and Understanding Your Business Sales Tax Responsibilities
- Do I have nexus? There are automated tools that can help you determine if you have nexus in a specific state or states. In fact, we have a free tool on our website… This DIY approach as we call it can help you understand potential jurisdictions where you may have established physical or economic nexus. However, they often can’t tell you if the items you sell are taxable or what the best next steps are to help you avoid costly situations where sales tax, penalty, and interest comes out of your own pocket. As we have discussed in other blogs, never ever automatically register or enter into an amnesty or voluntary disclosure agreement without first collaborating with a professional based on the outcomes of your DIY or automated “nexus review” or “risk assessment”. In fact, we recommend a second opinion even if you’ve consulted with a professional… it’s free - what do you have to lose, except sleep and money (if you get it wrong)? Collaboration builds confidence in your next steps.
2. Applying Sales Tax to Transactions
- This is where we ask ourselves, is what I sell taxable? There are many shifting variables to consider. You must know which jurisdictions sales tax may apply, what is being sold, the taxability of your products and services, the correct rate, and more.
Automation can be utilized in many ways through this process. However, you must be cautious when determining the type of automation you will use due to the complexity of this process. If a business is selling tangible personal property (TPP), they can utilize a calculation software which will help with the taxability rules of what is subject to sales tax and where. It can also help calculate the proper tax rate for the jurisdiction the TPP is being sold. Rarely, if the stars align, all you may need is an accurate tax rate. Automation does excel in this area, however, you will want to collaborate with a professional when choosing tax codes within these systems, especially regarding complex sales transactions.
However, fully automating this part of it can cause problems due to the fact that your nexus footprint can and most likely will change. In which case, you will need to update your sales tax software.
3. Filing Sales Tax Returns
- When you register for sales tax purposes in the applicable jurisdictions you’re required to prepare and file returns, make accurate and timely payments, and respond to the questions and notices routinely forwarded to taxpayers. These are nuances that automation simply cannot grasp.
Automation can be utilized in calculating and charging the proper sales tax. Nevertheless, human intervention - preferably a sales tax professional - will need to be involved in many situations that will undoubtedly crop up. Automation will fall short when the nexus footprint changes, filing frequencies change, notices appear or other nuances and questions arise.
The Limitations of Automation
While automation seems like a straightforward and uninvolved solution, there are inconsistencies and gaps that you need to take into account. This is where you need resources, perhaps an in-house staff member with knowledge of sales tax, who will stay involved to bridge these gaps that an automated solution leaves.
Software solutions may present the illusion that you are saving money and providing a simple solution to a complicated problem. And yet, if it is not managed closely it can cost your business all that money you are “saving” along with additional liability, penalties and fees. It can lead to errors and failed returns.
Hands-On Support is Needed
At the end of the day, it takes a sales tax expert to give you peace of mind around sales tax. While automation may apply the right rate and make the right determinations, you still need an expert to monitor and ensure proper compliance. When you approach automation as a supportive tool to the sales tax process paired with sales tax professionals you find you get the best of both worlds. If you have questions regarding automation, peace of mind is a “What’s Next Call” away.