By the SALTovation Team at TaxOps
Use of sales tax automation is worthwhile and beneficial for many companies, but not necessarily all companies.
There are a lot of sales tax automation companies out there delivering automation tools for sales and use tax (SUT) calculations. These tools automate the sales tax calculation process by integrating with invoicing or ERP systems, which pass data elements identifying the customer location, product, sales amount, and other invoice specifics to the automation system, which then calculates real time rates for various jurisdictions to accurately process and fulfill SUT documentation requirements.
Current tax rates and taxability rules are required to calculate applicable sales tax. Both rates and rules can be manually generated without sales tax automation tools. But as a business gets more sophisticated and the number of transactions across multiple jurisdictions grows, so too does the need for sales tax automation.
For a company selling taxable tangible personal property in select jurisdictions where the tax rates are easily accessible, then sales tax automation may be overkill. However, a company selling telecommunications services on a nationwide basis into various jurisdictions needs sales tax automation for accuracy.
Complications in Colorado
Colorado and several other states add a layer of taxation at the local level in what are known as home rule cities. Not all home rule cities participate in Colorado’s statewide Sales and Use Tax System (SUTS), meaning taxpayers have to do some extra work to capture home rule rates and rules.
Most of the software vendors — Avalara, OneSource, TaxJar, Quaderno, StripeTax, and Vertex — were not linked into SUTS at the time of this writing. Avalara, TaxJar, StripeTax, and Vertex were not universally using SUTS to remit their customers’ taxes. Furthermore, users of software systems such as TaxJar, StripeTax, and Quaderno could not collect the home rule taxes because none of these providers have the rates and/or rules baked into their products, though these providers are aware of the issues and are working on them.
Thus, to collect several layers of tax on one invoice – city, state, county, special district — when volume is significant, automation is key. Automation allows the slicing and dicing of tax data across invoice, customer, product and jurisdiction. If done manually, it is difficult to remit the tax because reconciliation needs to be done to properly report the tax, even if collected at the right rate. This manual process has inhibited taxpayers from using the SUTS because they just automate the collection, and their choice of sales tax providers is limited. If sales tax automation addresses home rule city compliance, the cost increases for that license exponentially as well as the cost for each additional return counted in the filings. This has meant that taxpayers have chosen to activate fewer cities in their nexus profile within a software product and limit their licenses to cities where they have the largest volume of sales.
The bottom line
Sales tax automation can be very beneficial when volume and accuracy across jurisdictions is paramount but can be overkill for companies selling into few jurisdictions with limited product. The time spent with a manual process must be evaluated against the cost of a sales tax automation for a final determination.
For more reading on this topic, see Sales Tax Automation Solutions: What Businesses Need to Know
For more general guidance, reach out to the tax professionals at taxops.com