Since the first adding machine showed up on counters to help shopkeepers tack on the correct sales tax, automation has been part of compliance. Now the buttons and the lever have given way to behind-the-scenes software and automatic functionality.
Good thing, too, as sales tax has evolved beyond a static percentage to involve thousands of tax jurisdictions and ever-changing calculations. But does the new automation always keep up?
Dependency and worry
Automation figures strongly in how companies stay ahead of their sales tax obligations, according to results from the third annual Taxconnex survey of top finance professionals.
Almost half the firms surveyed (49.51%) use integrated sales tax software or automated software for preparing and filing tax returns; more than a third (34.95%) use such software to track nexus and taxability requirements; more two out of five (42.72%) use it calculate the correct sales tax; and more than a third (33.98%) use it to field copious jurisdictional notices and communications.
That’s heavy reliance, especially considering that respondents also listed almost all those factors as among the most challenges of their sales tax obligations.
New tech
AI is no doubt the new tech player on the block for all forms of automation, and sales tax calculation is no exception. No surprise, since AI theoretically can scan and instantly deliver reams of the newest sales tax changes in America’s thousands of tax jurisdictions.
Among other uses:
- AI interacts with software and end users to streamline the providing of answers with, again at least in theory, little need to learn special computer languages or even jargon.
- New volumes of tax-related data, including transactions and filing information, can help troubleshoot reconciliations, improve forecasts and head off problems that could eventually lead to a sales tax audit.
Except that so far a straightforward ChatGPT inquiry into states’ tax changes doesn’t always turn up the latest information (early 2022 seems to be a popular cut-off period). Readily available (non-enterprise) versions of web-based AI don’t yet seem to have the intuitive nature they boast; more than a few tries at wording inquiries seem needed to come close to the latest and most accurate answer.
That could leave you vulnerable in your sales tax obligations as e-commerce morphs into more reiterations such as pick-up and q-commerce.
Other potential problems
Most sales tax calculation software today is SaaS-based (Software-as-a-Service). These tools often integrate with a company’s invoicing system; when an invoice is created or a transaction entered in a shopping cart on an e-commerce site, the invoicing/e-comm site will pass certain information to the sales tax calculation software. These data elements include the customer’s location, the dollar amount of the sale, and the product or service sold. Based on these elements, the sales tax calculation software will determine if sales tax is applicable and at what rate.
It may seem to make sense that if you are utilizing sales tax calculation software that you could also utilize the same company for the rest of the compliance process. Beware problems, though, that can lurk until it’s too late.
Determining your tax requirements. This consists of knowing where you have sales tax nexus, understanding the taxability of your various products/services and recognizing whether there are any exemptions or reduced tax rates that apply to your business.
Potential problem: Technology might be able to help you determine economic nexus based on bright-line distinctions as to what does and does not create nexus. But reviewing a potential physical presence is very fact-driven and nebulous.
Applying sales tax to your invoice or to a transaction in your shopping cart.
In which jurisdiction does the sales tax apply? What’s being sold and what’s the taxability? What is the correct rate?
Potential problem: You can’t correctly calculate sales tax without knowing these variables. And don’t deploy the wrong automation. Do you really need a third-party sales tax calculation solution that plugs into your invoicing system or shopping cart? Or can you manage the calculation of tax within your existing systems?
Preparing and filing the sales tax returns. You register for sales tax purposes with the various jurisdictions, preparing and filing returns, paying the jurisdictions, responding to jurisdictional questions/notices and so on.
Potential problem: Some supposedly simple solutions that attempt to automate steps one and two often fail here: the nexus footprint changes, filing frequencies change, notices pile in, certain transaction taxes occur that are not passed through on the customer invoice and are often not filed automatically or questions arise in the business that require the taxpayer to research these items on their own.
Automated systems are most effective when the rules and the processes to follow are clear-cut. This is seldom the case with sales tax compliance. Nuances, risk tolerances, changing invoicing systems, new e-commerce platforms, new product launches … the list goes on … can all lead to a very dynamic sales tax compliance obligation that needs to be managed by people, not bots.
If you have any questions or would just rather pass on the responsibility of sales tax to someone else, reach out. With TaxConnex, sales tax is all on us.