By Jon Abolins, senior tax director at Avalara
Most retailers wouldn’t dream of using an abacus to reconcile daily accounts when software exists which performs calculations and reconciliations at lightning speed. That technology increases efficiency, accuracy and productivity seems self-evident, but sales tax management is often stuck in the Dark Ages. In back offices everywhere, bookkeepers, secretaries, and finance managers are tracking sales tax rates manually, and making assumptions about product taxability based on web searches and guesswork. The truth is, this approach can increase audit risk and is prone to expensive errors. It doesn’t have to be this way. Technology can revolutionize sales tax management for companies.
Here are three ways technology can increase accuracy and decrease audit risk:
1. Knowing the right amount of sales tax to charge customers
Finding the right sales tax rate is as easy as cross-referencing ZIP codes with the associated rate, right? Wrong! Most people know that using look-up tables with a specific ZIP code will generate a sales tax rate. What they often don’t realize is that without the technology of geo-location (the same technology that powers your GPS devices), those rates are frequently wrong.
Within the Greenwood, Colorado ZIP code (80111), for example, there are four sales tax rates, some of them assigned to businesses on the same street. Geo-location drills down to the address level, corroborates with satellites, and validates the exact location of the transaction.
When a blunt instrument like ZIP codes is employed to determine sales tax rates and boundaries, calculation mistakes are almost guaranteed. Unlike more accurate tools with geo-location technology, ZIP codes lead otherwise savvy business people to conclude they’ve got sales tax compliance handled, when in fact they’re often using the wrong rate.
WHAT YOU CAN DO
When using an online tool to find sales tax rates, make sure you use one with address validation technology that includes geo-location technology, in order to ensure you’re deriving the correct rate. Alternatively, you can take advantage of one of the many integrated software solutions that determine rates and calculations for you.
2. Knowing whether to collect sales tax on a product
Determining when to charge sales tax on which products and at which rate can be very complex. Charge too much tax and customers might get angry and start shopping elsewhere. Charge too little tax and end up having to make up the difference and pay the state missing sales tax out of already slim profit margins.
Product taxability for grocers and other retailers can be a nightmare given variable tax rules, sales tax holidays, and exemptions.
In Illinois, for example, gift baskets are taxed at the same tax rate as food, if over 50% of the value of the gift basket is derived from food products. Conversely, if over 50% of the value of the basket it is derived from non-food items, the sales tax rate applied would be higher. In short, sales tax rules can be convoluted and confusing and assumptions about tax rates and rules must be corroborated if a company wants to avoid errors. As taxing jurisdictions change taxability rules regarding goods and services, businesses are required to adjust accounting programs accordingly. If your company tracks changing product taxability rules manually, without the aid of automated software, you’re likely to make errors, some of which might create a red flag for auditors.
WHAT TO DO
Using integrated software to assign the right tax rates and rules to each product increases accuracy, speed, and efficiency and can save money on audits fines and penalties. There are software programs that can do this at the SKU level. Otherwise, manually tracking product taxability is slow and onerous as well as very prone to error. For more information on product taxability, go here. For a list of sales tax holidays, go here.
3. Knowing where and when to file
For each taxing jurisdiction in which it is registered, a business must meet filing deadlines and provide timely remittance using the correct forms and formats.
This step sounds simple. And for many businesses it may be easy, especially those with nexus in only one state. Things grow more complex when the business adds a location in another state and then another. With each new city or state, there are a host of new guidelines addressing filing and remitting.
States often base audits on inconsistent or erroneous payment processes, especially those that lack adequate calculations, formulas, and other documentation. State tax computers are likely to red flag any reporting that fails to stand up to what the tax authority views as a consistent and verifiable process.
WHAT TO DO
When it comes to knowing when and how to file sales tax returns and payments (some states now require electronic filing), the best place to start is the applicable state Department of Revenue. Manually tracking and summarizing state remittance rules is time consuming and onerous. Yet another reason to use technology to increase efficiency.
The rise in popularity of automated sales and use tax audit solutions represents a major shift in the marketplace. Until the advent of this highly developed technology, only larger corporations with multi-million dollar budgets could afford sales and use tax compliance solutions. Mainstream businesses had no choice but to rely on accounting departments, which, as we’ve seen, tended to overlook such critical issues as process and workflow. Not anymore. Affordable technology solutions are available for businesses of all sizes.
Jon Abolins is senior tax director at Avalara, which pioneered a service-based platform for sales tax and compliance automation. The company’s cloud solutions helps customers stay focused on their core businesses by providing automated end to end compliance services including sales and use tax calculation, exemption certificate management, filing and remittance, and a broad array of related services.