Automated Tax Solutions

Small businesses face the continuing problem of understanding sales tax concepts and applying them appropriately. Learn how web-based automated software can help alleviate that issue.

Geni Whitehouse, CPA.CITP, CSPM

Let’s face it: sales taxes are boring. Yet they represent an increasingly important source of revenue for states. In fact, states such as California are discussing how to broaden and deepen their sales tax base and, as a result, you can expect to see increasing audit activity in every state. It’s tough enough for those of us who do this for a living to keep up with sales tax rates, rules and jurisdictional changes, how can we expect our small-business clients to stay ahead of the state auditors? Technology could be the answer.

So Much Info, So Little Time
The biggest problem businesses face is understanding sales tax concepts and applying them appropriately:

Nexus: Companies must determine their connection to every state in which they have sales. For example, most don’t understand the nexus implications of sending their repair person across state lines or hiring a phone rep in another state.
Taxability: Businesses must determine if a customer, product or service is subject to tax. They have to manage resale exemption certificates, interpret state taxability matrices and pay attention to particular nuances.
Sourcing: If a sale is taxable, organizations must determine which jurisdiction is imposing the tax so they can apply the correct rate, which means they must first understand the distinction between origin- and destination-based sourcing rules, which can be complicated. California sourcing rules are addressed in the Revenue and Taxation Code secs 7205 and 7263.
Rates: According to Vertex’s annual Sales Tax Rate Report, there are, on average, 1.9 sales tax rate changes per day. Is it realistic for a small business to be expected to know, for example, that as of Oct. 1, 2008, the city of Pacific Grove imposes a 1 percent transaction and use tax?
Return Filing and Remittance: Once a business decides which state it owes, it must file a myriad of state and local returns with various taxing authorities. California,
for example, uses a single consolidated return, but many states require filings in local jurisdictions.

Who has time to run a business and be a sales tax expert?

The Solution: SaaS
Small businesses can look to automation, rather than hire a team of experts, to keep them out of trouble.

Web-based automated solutions, often called software as a service (SaaS), are ideally suited to handling the constant rate and jurisdiction changes that are the norm in sales tax compliance. With these software solutions, changes are tracked by a central service accessed online.

In addition, taxability decisions are automated and managed at the moment they are entered in the source accounting application through a web connection to the SaaS engine. The right solution allows small businesses to tap into a centralized repository containing all of the possible rules that apply across industries related to a particular transaction, while still having access to a configurable-rules engine to manage nexus, sourcing rules, exemptions and other settings unique to their business.

SaaS solutions also bring the strengths of a central-service model to returns generation, filing and remittance. All connections are made to the source transaction in their accounting applications.

Which SaaS Solution and Vendor?
Several SaaS solutions have been certified, a sort of by-product of states’ efforts to make it easier for small businesses to comply, while also attempting to gain support from federal lawmakers for increased taxation. Under the Streamlined Sales and Use Tax Agreement, a number of states have created a more uniform system of rules. In addition to defining standards, the agreement addresses the technology needed to comply with its provisions. More information is available online.

States are not mandated to adopt SSUTA and the agreement is a voluntary election by the seller. California, for example, has not chosen to adopt SSUTA. However, companies will want to follow the rules in their state and the states in which they have nexus.

The technology certification provided under the agreement still benefits California residents, and yet, the state’s decision not to follow SSUTA makes compliance more difficult because you have to be able to manage all states—or at least the ones in which clients and companies do business. To bring some clarity and assist in this effort, the SSUTA board vetted and certified four solutions: SpeedTax, ADP Taxware, Avalara and Exactor. This certification is an important consideration when selecting a sales tax vendor.

How to Help
Accounting professionals should educate themselves on sales tax. Learn about areas where clients might have exposure and help them understand the implications for their business. Chances are that clients will benefit, but may be unaware that they have a need.

Be sure to question your clients about their sales tax solution, and inquire about their accounting software and how it addresses this critical area. Offer to periodically review their rate tables, and interview them regularly about changes in their business that might have an impact on taxability. In addition, be sure to direct them toward SSUTA-certified SaaS vendors.

8 Features of a SaaS Sales Tax Solution
In addition to SSUTA certification, a sales tax solution should have the following attributes:

Integration: Links to your client’s ﬁnancial and e-commerce solutions ensure correct sales tax calculations feed into invoicing and customer maintenance processes, and eliminate the risk of error associated with manual lookups.
Reporting: Includes management reports, detailed transaction reports and a comprehensive audit trail.
Filing controls: Built-in controls monitor due dates and balances due, including role-based privileges to strengthen security while enabling quality control.
Accuracy: Sophisticated technology determines the correct tax rate. Ideally, the solution should apply mapping technology with geographic data to the U.S. Postal Service database of valid U.S. addresses.
Sophisticated centralized rules engine: Clients should be able to tap into a centralized repository containing all of the possible rules that apply across industries. Access is provided to a conﬁgurable rules engine that can manage nexus, sourcing rules, exemptions, exceptions, shipping locations, SST volunteer status and all other settings unique to your client’s business.
Designed for exceptions: Think about an environment of constant change and individual exceptions. SaaS sales tax solutions that rigidly manage rules tables individually for each company or client are limiting the beneﬁts that are otherwise available in a flexible SaaS product.
Expertise: The solution should be supported by a team of qualiﬁed staff to help your client properly conﬁgure it.
Management tools: A quick view, for example, of transactions across multiple periods and clients helps you stay informed about the status of all of your clients.

Geni Whitehouse, CPA.CITP, CSPM, is founder of Even a Nerd Can be Heard, an organization focused on communication skills for accountants and the people who count on them.