On June 21, 2018,
the U.S. Supreme Court issued a momentous decision that affects remote sellers
and service providers across the country and the digital economy at large. The
Court’s South Dakota v. Wayfair decision
allows states lawfully to require remote sellers to collect and remit sales and
use taxes if they have an economic nexus, usually defined as a certain number
of transactions and/or a minimum amount of revenue, with the destination state.
After South Dakota’s law was upheld, other states enacted similar laws. Today, 42 states have economic nexus for sales and use tax, some with enforcement deadlines approaching (Colorado, Pennsylvania, and Texas have enforcement deadlines of June 1, July 1, and October 1, respectively). If 42 separate tax rates sound like a lot, try 16,000—that’s the ballpark of state and local tax rates in effect at any time. Adding to this administrative nightmare, tax rates can change on a monthly basis, generating as many as 600 to 700 changes throughout the year.
Companies across industries and of all sizes have to contend with the fallout resulting from Wayfair, but it has been particularly onerous for middle-market companies that often don’t have existing internal processes and procedures in place to address these challenges.
There’s an Automated Solution for That
How can a company surmount the seemingly impossible
task of monitoring thousands of shifting tax rates, let alone comply with them?
The answer is automation!
Automated software solutions offer several benefits, including:
- Tracking tens of thousands of tax rates in real time.
- Access to taxability information to determine how products and services are taxed in various jurisdictions.
- A history of transaction data that can be used to compile tax returns and provide a single source of information in the event of a sales tax audit.
- Assistance with managing exemption certificates for tax-exempt sales.
Automation is a critical tool for companies that are
currently managing sales taxes in multiple states, as well as those that have
exposure and are assessing how to manage it. But, without institutional
knowledge, companies risk failing to select appropriate solutions for their
specific needs, which could result in substantial tax assessments including
related penalties and interest worth hundreds of thousands of dollars.
The benefits of indirect tax automation are vast but, given the dozens of third-party solutions available, it’s challenging to know where to start. The first order of business is to do a thorough analysis of your company’s needs—from accounts payable and sales invoicing to enterprise resource planning (ERP) and accounting software—and how they may align with a software vendor’s services.
Some companies’ needs are straight-forward. For example, a soap maker based in Ohio selling only tangible property through an e-commerce platform may only need access to all the state and local tax rates in the country. Basic tax rate subscriptions can track sales tax rate changes anywhere in the United States on a monthly basis, if properly implemented. The biggest advantage to these subscriptions is the ability to sort through tens of thousands of tax rates immediately and apply the correct one. That said, as companies grow, they may need to think about the different product and service lines that they may branch into and how those new revenue streams affect compliance.
Other companies’ needs may be more complex and call for a full tax determination and calculation solution—a powerful calculation engine that can be integrated with an ERP program to execute real-time tax calculations (in milliseconds), for things like customer invoicing. These software solutions contain pre-defined taxability content at the state and local levels. The supported content covers many forms of tangible personal property or services offered by most businesses. The idea here is to map a company’s product and service codes (in the case of sales invoicing) to the equivalent tax code categories within the tax engine to achieve the proper tax result. Once mapped correctly, the taxability of these items is maintained by the tax software vendor, thereby obviating the need continually to perform in-house tax research on items sold in the United States and in international jurisdictions.
Say, for example, a company in Texas sells grocery items, and a state to which the company ships a product begins to impose a one percent tax on grocery items. The company’s tax software, which has a tax content module, updates the content behind the scenes so that the one percent tax is already included when the transaction detail or invoice is sent. This type of solution is particularly critical for smaller companies without a tax organization or sales tax knowledge.
Death by Exposure
Exemption certificate management is another area that
can result in a significant sales tax exposure. For example, a company that
previously did not need exemption certificates because it sold only taxable
goods would never have had this exposure under audit. Now, companies need to
collect exemption certificates when shipping to exempt customers—even in states
where the companies have no physical presence. Many software packages include a
module that will assist in managing customer exemption certificates. These
software packages will help the company review, approve or reject a customer’s
For large companies especially, the absence of a single exemption certificate could result in millions of dollars of exposure. The automation solution will maintain electronic copies, track the expiration date of the certificates on file, and support hundreds of various exemption certificates that are available throughout the country. Furthermore, for any companies looking to be acquired, having this kind of unmitigated exposure could scuttle a deal, particularly as buyers of all types begin to factor the aftermath of Wayfair into their due diligence processes.
Automation Leaves More Time for Strategy
Between Wayfair, global tax changes, and tax reform, the tax landscape has undergone more changes in the past 12 months than in the last 50 years. Tax professionals must understand these changes to advise senior management effectively on the tax implications of strategic business decisions. At the same time, they need to lead initiatives to support the organization’s financial objectives and help facilitate growth. Automation enables tax professionals to spend more time on strategy and less time on manual data collection and monitoring, allowing them to manage existing changes and to prepare for those that might materialize down the line.
Please contact the Crosslin tax team at 615-320-5500 for assistance with your tax needs. As always, we appreciate your business!