Why Sales Tax Compliance Is Challenging
U.S. sales tax compliance can be complex when a business has operations in several states and local jurisdictions. Each state has its own tax laws, but counties, cities, districts and other taxing bodies can also impose their own rules.
Businesses must determine where they need to pay sales tax, what is taxable, how to transact, whether customers are exempt from sales tax and how often they have to file returns.
Also challenging is the number of transactions one has to deal with. Although spreadsheets work fine with a limited number of transactions, they can be difficult to use when volume increases. Mistakes in calculations, reporting or filing can lead to under- or over-collected taxes, gaining notices, fines or having to spend time on taking corrective measures.
However, having software does not in any way mean that one does not need professionals to intervene. It is still important for a company to set the system up properly and to review difficult cases.
What Is Sales Tax Compliance Software?
Software for sales tax compliance assists companies in calculating, collecting, filing, and remitting sales and use tax in the United States. The software typically integrates with ERP systems, accounting software, e-commerce stores, billing systems, POS systems, and marketplace applications.
Specifically, for determining tax liability during a transaction, the software will check:
- Location of the seller and the customer
- State and local jurisdictions that apply
- Taxability of a product or service
- Where the product is sold from
- Whether the customer is exempt from sales tax
- Applicable tax rates and rules
Sales tax compliance software will then send back the tax amount to the application it is connected to. For example, when the customer provides an online store with their delivery address, the software can determine the appropriate jurisdiction and calculate sales tax before processing payment.
Sales tax calculation is only one part of sales tax compliance; proper compliance can also entail:
- Nexus and registration analysis.
- Sales tax return preparation and filing.
- Payment remittance.
- Exemption certificate management.
- Filing-calendar monitoring.
- Reconciliations.
- Notice and audit support.
Businesses should confirm which services are included in a provider’s plan. A tax engine may calculate tax without preparing or filing returns, while a managed compliance package may include additional professional services.
Important Features to Evaluate
- Tax Calculation Automating
The software must calculate tax based on the location of the transaction, classification of the product, status of the customer, and existing regulations. This eliminates the need for manual work and allows businesses to ensure consistency in the taxation of sales across different channels.
- Support for Multiple Regulations
Businesses operating in the USA may need to comply with local rules from different states, counties, cities, etc. Good software is able to store a variety of regulations and find the most suitable tax rate based on the parameters of the transaction.
- Preparing and filing taxes
Tax filing software can process transaction records and fill in local and state forms. Some companies can also electronically submit and pay the taxes of their clients. It is important to check whether the software supports the regulations of the locality where the business operates before purchasing it.
- Reporting
Tax reporting software must provide detailed information about taxable and non-taxable sales, sales taxes paid, and summaries of transactions for a given period for certain jurisdictions.
- Exemption certificate management
Exemption certificate tools help businesses collect, validate, store, and monitor resale, nonprofit, manufacturing, and other exemption documents. This is especially important for businesses that sell to wholesalers, resellers, government entities, or tax-exempt organizations.
- Updated rates and compliance alerts
Tax rates, jurisdiction boundaries, filing forms, taxability rules, and deadlines may change. Automated updates reduce the need to maintain tax tables manually. Alerts can also help identify approaching deadlines, missing information, unusual tax amounts, or exemption certificates that require attention.
- Integrations and audit records
APIs and prebuilt connectors reduce duplicate data entry between sales, billing, accounting, and tax systems. Audit-ready records should show transaction details, applied jurisdiction, tax calculation, exemptions, adjustments, and filing activity.
Avalara
Avalara offers different services such as calculating sales tax, submission, managing exemption certification, registration, and complying with tax laws and regulations. The AvaTax system offers tax calculation services through API interoperability. Other solutions from Avalara take care of tax remittance, tax-document workflow, and filing for tax.
Avalara claims that the system operates in 12,000 states and territories in the U.S. and lists available integrations with systems such as NetSuite, SAP, Oracle, Microsoft Dynamics, QuickBooks, Shopify, BigCommerce, WooCommerce, Adobe Commerce, and Stripe. [Avalara]
Avalara can be a good solution to businesses that are looking for seamless compliance system and extensive daily integration functionalities. It can also be helpful for CPA companies that have clients onboard with various accounting, ERP, or e-commerce systems.
The advantages of the system are wide geographic coverage, numerous compliance services, and flexibility with integrations. At the same time, considerations that business has to take into account include implementation, product configuration, pricing, and capabilities of an acquired plan. Businesses need to check if the required services such as filings, returns, notices and exemption workflows, and registrations are covered.
Vertex
Avalara offers different services such as calculating sales tax, submission, managing exemption certification, registration, and complying with tax laws and regulations. The AvaTax system offers tax calculation services through API interoperability. Other solutions from Avalara take care of tax remittance, tax-document workflow, and filing for tax.
Avalara claims that the system operates in 12,000 states and territories in the U.S. and lists available integrations with systems such as NetSuite, SAP, Oracle, Microsoft Dynamics, QuickBooks, Shopify, BigCommerce, WooCommerce, Adobe Commerce, and Stripe.
Avalara can be a good solution to businesses that are looking for a seamless compliance system and extensive daily integration functionalities. It can also be helpful for CPA companies that have clients onboard with various accounting, ERP, or e-commerce systems.
The advantages of the system are wide geographic coverage, numerous compliance services, and flexibility with integrations. At the same time, considerations that business has to take into account include implementation, product configuration, pricing, and capabilities of an acquired plan. Businesses need to check if the required services such as filings, returns, notices and exemption workflows, and registrations are covered.
Sovos
Sovos offers advanced technologies to help with tax determination, reporting, filing, and exemption certificate management. Its sales tax compliance solutions include filing and remittance support across more than 12,000 authorities in the U.S. and more than 150 jurisdictions around the world.
Sovos' technology consolidates data generated by transactions in the tax compliance process, thereby offering tools for managing compliance with tax laws, compliance reporting, and claim management for exemption certificates.
The service is a good choice for large-scale companies with complicated operational systems that operate in many tax jurisdictions. CPA firms can use solutions provided by Sovos for clients that require sophisticated tax reporting.
Differentiate between different tax consulting products and services included in many companies' offers.
TaxJar
Focusing on sales tax automation for e-commerce and digital businesses, TaxJar offers a variety of solutions.One of them is an API for sales tax calculations, reporting software, and Auto File for completing state returns.
According to TaxJar, Auto File can be used in every U.S. state, except Alaska, provided that a user enrolls in the service. In addition to Auto File, the company provides reporting tools that compile information about e-commerce transactions and provide details about them per state on a detailed basis.
TaxJar can work with various online commerce platforms like Shopify, Square, or WooCommerce.
TaxJar can be a great tool for small and medium-sized e-commerce companies looking for a simple process of calculating, reporting, and filing sales taxes. It can also be useful for CPA companies working with e-commerce platforms with established tech stacks.
It is important for businesses to check if the services are available for the necessary platforms, products, tax jurisdictions, requirements regarding exemption, and reconciliation procedures.
Benefits for CPA Firms
Sales tax software can help firms in managing their compliance requirements for many clients. Standardized data feeds, filing documents in the correct format and multiple reviews can assist in significant reduction of time previously taken to build spreadsheets again and again each filing period.
The main advantages are:
- Less manual work required to check the taxation rates and input transactions.
- Higher degree of awareness of different deadlines and liabilities of clients.
- Easier dealing with different jurisdictions.
- Speedy reconciliation of tax accounting and ledgers.
- Better detection of anomalies in tax paid and missing data.
- Standardized process of developing and approving returns.
- Better documentation of clients’ files and audits.
- More time for nexus studies, planning and consulting.
Nevertheless, despite being beneficial, software will still require professionals’ supervision. Staff has to check registrations, product eligibility, customer exemptions, filing instructions and irregular transactions.
Moreover, companies have to decide who is going to handle the filing and payment and communicate with the tax authorities.
Software v/s Outsourced Support
For tasks that are rule-based and can be repeated, software works well. Some of the tasks include the following:
- Determining taxes on sales.
- Applying taxes and rates that are needed.
- Processing transactions properly.
- Creating reports that are required by different authorities.
- Preparing and filing tax returns.
- Linking different systems in place for processing taxes, billing, and e-commerce.
- Keeping records for e-compliance.
For tasks that need special attention, professionals help in decision-making. Tax professionals perform the following functions:
- Evaluating nexus and business registration.
- Analyzing taxes on products and services.
- Monitoring the obligations of the business.
- Reviewing reports prior to filing.
- Reconciling tax liabilities with accounting.
- Dealing with notices and problems in filing.
- Managing changes or corrections in compliance.
- Assisting with audits and inquiries.
Software adds value to professional services to help understand tax logs and more complicated compliance requirements. A business may start using software such as TaxJar or Avalara and then employ CPAs or tax professionals for providing services. A larger company may purchase a tax solution from such companies as Vertex and Sovos and still employ professionals to support the solution with tax knowledge and control.
How to Choose the Right Solution
Before selecting tax compliance software for sales considerations, please consider the following aspects:
- Business type: Different business models such as e-commerce, SaaS, manufacturing, wholesale, and professional services may have their tax and incorporation rules.
- Jurisdiction and location: Determine in what states the business has registered, in what state it might have obligations, and where it has to file.
- Volume of transactions: Think about the sales volume, the number of products being sold, returns, and possible discounts and if there are exempt customers.
- Required integrations: Check the compatibility of the needed software with the existing accounting, ERP, billing, marketplace and payment systems.
- Filing requirements: Check whether you need calculation only, report preparation, return filing, and remittance
- Exemption needs: Think about how you will collect certificates, validate them, and store them.
- Scalability: Consider if your business will remain unchanged or expand in the nearest future.
- Professional help: If you would be able to do everything internally.
- Total cost: Estimate the needed cost of software solutions, transaction, return, integration, implementation, and professional service costs.
Conclusion
Sales tax compliance software helps businesses automate tax calculation, reporting, and filing while reducing manual work and compliance risks. However, professional oversight remains important for complex requirements, reconciliations, and exceptions.
Need help with sales tax compliance? Contact Us to learn how our team can support your business or CPA firm.
