Selecting Sales Tax Software: Get it Right from the Start 

by | Mar 1, 2023 | State and Local, Tax News

There are many things that need to happen in addition to and outside of sales tax software – obtaining proper licenses, understanding your nexus, knowing what rates should be applied, understanding what’s taxable, and properly mapping taxability decisions to products. This work makes the software operate correctly and there is no way to avoid it, no matter what software providers say. Let’s get it right. 

By Judy Vorndran

Businesses facing the decision to get in bed with a sales tax automation provider typically ask us, how do I know which one to choose? That is a good question. What they do not ask, though, is whether automation is enough to make them sales tax compliant? 

Software vendors often tell businesses to sign up here and we’ve got you covered. But do they? Are some vendors saying sales tax automation is the ticket to compliance confusing the heck out of the market right now? 

The answers are depends, no, no, and a definitive yes! When what a business decision maker is hearing is not straight talk on sales tax, but rather tech-talk from a technology source, then the path to sales tax compliance becomes littered with mistakes that can prove costly. 

When taxpayers buy sales tax automation solutions without getting the advice they need during the selection and implementation process, errors are made. These include:     

  • Setting up technology without understanding when and where to register. Forty-six states have a state level sales tax and there are over 13,000 local jurisdictions (cities/counties and local taxing districts)  
  • Implementing technology without understanding where to set up nexus can lead to costly audits   
  • Pursuing sales tax automation as a one-step process without an advisory partner who understands the comprehensive nature of sales tax administration end-to-end can lead to expensive errors   
  • Nexus set ups that result in incorrect filings in more places than a taxpayer is obligated to file increases compliance costs, and choosing the wrong set up based on the type of nexus in a state – i.e., physical or economic presence  
  • Using a filing calendar with too many or not enough selected jurisdictions (13,000, remember?!)  
  • Products mapped incorrectly to tax decisions – each state has the autonomy to tax things how they choose, there are no one-size-fits-all answers, even with streamlined sales tax definitions  
  • Registering incorrectly affects the type of tax collected, and registering, period, often creates multiple tax type filing obligations (i.e., income tax) due to information sharing among government agencies 
  • Thinking the sales tax software is handling the returns and thus, not putting in place a review process to catch errors  
  • Mismanagement of exemption certificates, especially when wholesale or supply chain complexities or parent-child relationships cross state lines  

That’s when we get called in, to fix the problems. We are state and local tax advisors who are passionate about getting it right for taxpayers. This includes practical, transparent answers in what is a very nuanced, legal and risky area of tax. 

With all that’s wrong with leaping first without the answers, or even knowing the questions, let us focus on helping you get what is right. Buy the software only when it is the right fit. And, the only way you’ll know if it is the right fit is to work with a state and local tax advisor like TaxOps. Bring us in on the front-end and avoid the costly problems, headaches, frustration and all else that comes from being a government fiduciary with legal obligations, without an in-house state and local tax department. 

Get set up correctly from the start  

Pursue remediation if you are in a pickle. If you leapt into sales tax automation with the big unknown hovering overhead, clicking boxes in the software set up that do not in fact reflect the operations of the business, more likely than not, will result in mistakes.  

Let’s get them cleaned up. Registrations made in the wrong jurisdiction? States not accepting returns filed incorrectly? Not getting any help from the software vendor? No problem. Let’s set it right. 

Leverage knowledge 

What we really hate is when some taxpayers are trying hard to do the right thing and still get burned. For example, quite a few businesses hire lawyers who secure Secretary of State filings, but do not understand that these can lead to both sales and income tax filings. Lawyers typically do not do sales or income tax filings.  

Other companies hire payroll agents to do payroll filings, not understanding that remote employees create other tax obligations. Many taxpayers have their IT or internal accounting department set up sales tax within their ERP or via Shopify or StripeTax, or think Avalara or another sales tax software provider like Sovos, Vertex, or TaxJar have all the answers, but the imposition of taxes depends on the type of business, where you do business and how.  

Often nexus is turned on without review or an understanding of the complexity of state taxes, but sales tax remittances don’t get filed because the tax calendar was never set up and registrations didn’t happen. Suddenly the business is looking at the dollars owed across the country for taxes that total hundreds if not millions of dollars that were collected, but not remitted. Sound familiar? 

A nexus study from TaxOps would have straightened this out, provided the answers to click the right boxes and make sales tax automation software work for the taxpayer. Absent that study, though, and the taxpayer flies blind.  

Not all nexus studies are the same. TaxOps looks at the nation holistically and does not exclusively focus just on sale taxes, but on other potential taxes that could affect a business in each state. This creates a comprehensive tax risk and obligation profile uncommon in the industry. 

Over- or under-collecting 

When taxpayers go alone without the proper guidance, sales tax automation software can often be incorrectly set up to over collect tax, especially when vendors open a shopping cart with products like Shopify with rates baked into their product or Shopify+ that has an integration with Avalara. Or even ERP systems like QuickBooks and NetSuite have sales tax functionality. The nuances of your unique business, however, are not baked into the software unless you add the ingredients.   

You would never use an out-of-the-box system without some element of customization so why do taxpayers expect sales tax software to do it all? There are many things that need to happen in addition to and outside of sales tax software – obtaining proper licenses, understanding your nexus, knowing what rates should be applied, understanding what’s taxable, and properly mapping taxability decisions to products. This work makes the software operate correctly and there is no way to avoid it, no matter what software providers say. And when mistakes inevitably happen because the foundation was not properly laid, there are T’s & C’s within your software contract that push the problem back onto the taxpayer, not the software provider.   

While we could give you a list of ways to vet for the right software for your business, there’s no substitute for having at your disposal a resource that knows sales and income tax, inside and out. Save yourself time, money, hassle, frustration and get our help to be wildly successful.   

Why is it that people think sales tax is so easy? The simple answer is we don’t know what we don’t know, so ask for the right resource, a tax advisor, instead of listening to the loudest software vendor in the marketplace. It’s a sales tax specialist with passion, experience, and expertise who believes people matter and knows tax compliance is holistic; software is just one piece of the whole.   

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