Avalara’s Avatax

Getting a Handle on Sales Tax

We often encounter e-commerce vendors who believe that sales tax is fairly simple and straightforward – “All I need is a rate, right?” or “I’m only doing business in a couple of states, and I know what I need to know.”

The truth about sales tax is that it is anything but simple!  Congress, which has the constitutional authority to regulate interstate commerce has so far not done very much (not really anything!) to regulate electronic commerce.  As a result, states, counties, and local municipalities have stepped into the void and passed their own laws defining rules, rates, and boundaries.  When these have been challenged in the courts (and they have been, frequently), the courts have been very wary about usurping Congress’s authority, with the result that most of the state laws that have been challenged have been upheld.

The result, if you’re a merchant who does business over the internet, is that you are responsible for knowing the often arcane rules that govern sales tax compliance from state to state, and within the states at the county and local levels.  In Colorado alone, there are 700 different rate combinations, according to the Department of Revenue!

What are some of the common misconceptions around sales tax compliance? Does automation make sense?

Misconception 1: Sales Tax is Easy

At a recent meeting, we asked our own Avalara sales people to give manual sales tax management a shot. They were given a series of exercises, a set timeframe and one caveat: no Avalara automation tools could be used. They had to figure it out the way most companies do—by downloading rate tables, visiting state websites, plugging numbers into invoicing systems, determining exempt sales and filling out complex tax return forms. No team got it all right in the time allotted. That’s because sales tax is hard. There are countless things that go into ensuring sales tax is being done correctly and when you tie in the fact that there are more than 12,000 taxing jurisdictions, thousands of product taxability rules in the U.S., and the rules are subject to change, it’s not easy.

Misconception 2: My Platform Already Automates Sales Tax

Most platforms have built-in sales tax functionality, but it’s very basic. Not only does it require manual work to configure and update, you can’t be fully accurate as most sales tax functions provided by the platform use Zip-code based tax tables to drive the calculation. And, these platforms typically provide limited support for handling specific sales tax rules tied to sourcing, product taxability or exemptions. In addition, the sales tax reporting available doesn’t expose the data in a format required to support the filing process and some “accounting gymnastics” are still required of the accounting team or CPA to try and pull it all together.

Misconception 3: Sales Tax Automation is only for Big Companies

“My company is too small” or “We only have to collect in one state” are common objections we hear. Companies of all sizes can benefit from sales tax automation as risk is risk whether you have it in one state or all states. Time spent on understanding tax rules and ensuring compliance manually is wasted time that could be focused on revenue-generating activites, rather than the pass-through activity of sales tax. Factor in a sales tax platform that is delivered as a SaaS solution with pricing based on usage, and you have ROI for small merchants, large enterprises, and businesses of all sizes in between.

We also often see differing perspectives on sales tax depending on who we’re talking to.  For example, the e-commerce director believes that sales tax is simple and straightforward (“I just need a rate!”), while the controller or CFO is far more concerned about accuracy and compliance.  This disconnect around sales tax makes sense given that each has different priorities. e-commerce is concerned with go-live dates and user conversion rates. Finance is tasked with process and precision. Automation actually achieves both. Fast, accurate calculation of sales tax at the point of sale impacts customer satisfaction and improves sales. Complete reporting of taxable and exempt sales saves time and lowers audit risk.

We could go on and on with more examples and sales tax horror stories, but the bottom line is this – whether you only do business in one state (or think you do!), or you have a healthy multi-state business over the internet, you are required to understand the various regulations regarding sales tax in the places where you do business, and to calculate, remit, and report sales tax to all the various jurisdictions in which you do business.  Unless you’re a multi-billion dollar company with a dedicated tax department, keeping track of everything you need to know, being accurate and compliant, and doing it all manually is virtually impossible. Automating sales tax compliance can not only make your life easier, but it can make your business more profitable, and insure that when you get audited by one of the states in which you do business, you’ll be prepared!