Best Practices in Transaction Tax Systems Implementation
Learn the best practices in transaction tax systems implementation with this free resource.
It is virtually impossible to stay on top of every sales tax rate and rule change on your own. By various estimates, there are between 7,500 and 14,000 different authorities that impose a sales tax in the U.S. alone! This includes not just counties and cities, but also special purpose districts such as transit, stadium, police, school, and convention. According to sales tax software provider, Vertex, there have been 2,202 new sales and use taxes since 2011, an average 220 per year!
Sales tax automation systems are businesses’ allies in keeping track of these continual changes. Businesses that operate in multiple jurisdictions and sell items that have different taxability should implement a sales tax automation solution to accurately manage their sales and use tax obligations.
Another important reason to implement a sales tax system lies within your company itself. Accurate sales tax collection is dependent on many different people and departments making correct decisions. A sales tax automation system prevents costly mistakes by limiting much of the human error involved in disjointed decision making and manual data entry.
Selecting the right sales tax automation system for your company is a decision you want to get right the first time. You want to go into the selection process fully informed of all the options available and in-depth understanding of the sales tax activities you want to automate.
To kickstart your decision-making process, here are four things you need to know before your company chooses a sales tax automation system.
If your company decides “Yes! We need an automated sales tax solution!” you first need to understand the different types of systems available. Some options may better suit your company’s needs than others.
Sales order/billing systems usually include tax processing capabilities, you can evaluate if your host system that’s already in place has enough functionality to meet your company needs or if it is too limited. Your company may best benefit by implementing a bolt-on tax specialty product to interface with the existing sales order/billing system. Bolt-on products offer more sophisticated tax processing.
The industry your company is in might not have a third-party solution and therefore a custom designed system might be the right choice. Custom designed systems are often incorporated into custom billing systems and can accommodate unusual tax requirements or non-standard sales tax rates that may apply to your industry.
If you only make sales on marketplaces, you shouldn’t need a tax calculation system as the marketplace will calculate the tax. You might need to file the information on a return or in just Missouri you would need to file and remit the tax. Some e-commerce systems may have limitations on their ability to integrate to a tax bolt on system and others maybe have it “baked in”.
At the end of the day, even something like a simplified Excel spreadsheet could be the right solution for your company. The most important thing is that the solution you choose streamlines and manages the processes you need.
Once you understand the different types of solutions that are available, the most important step is to take an in-depth look at where automation can address your business needs. This requires coordination with all the different areas that are involved in the sales tax determination process such as customer service, sales, order entry, accounts receivable, accounting, and of course, tax. You need to know all of the different department-specific systems that the tax engine will need to connect to – from order entry and invoicing to e-commerce and accounts payable.
Don’t forget to include IT requirements in your evaluation like in-house or hosted systems, operating languages, security constraints, and which applications the tax solution needs to integrate with. Your IT team members are important partners to include throughout the selection process.
Vendors provide tools that can vary greatly in their capabilities. When you have a complete picture of your company’s needs and requirements, you are setting yourself up for success in selecting the correct automation solution.
You may feel inclined to perform this step first – don’t! You should not evaluate vendor options until you understand the types of systems available and your business needs. Success in selecting the right vendor depends on a comprehensive evaluation of the options available that is centered around whether or not the vendor can meet your specific requirements. Don’t waste time talking to vendors that aren’t true options just because you think they are the leading contender.
If, for some reason, your company requires you to consider a certain number of vendors, you may want to push back if you know that there are only two on the market that can actually meet your company’s needs. There’s no sense in spending time considering vendors that won’t work out.
A comprehensive evaluation should include demonstrations by each of the vendors using data that is representative of your business. By doing this, you’re helping to ensure that the solution you choose will work best for your company’s needs.
Your company’s needs may require you to implement multiple solutions. If there is a need for solutions in different categories such as sales tax calculation and return preparation, be sure to evaluate interaction and ease of integration between the different solutions. This is particularly important if you are selecting solutions from different vendors. Ensure they work together, or you’ll have headaches down the road.
These ‘four things to know’ may seem simple at face value but usually involve a lot of outside research, internal process investigating, data gathering, and vendor interviewing. The sales tax automation selection process takes time and may feel overwhelming, but the journey is well worth it! With all kinds of new sales tax legislation being passed, companies with nexus in multiple states can have major burdens relieved with the right system in place to keep everything up to date and organized.
Diane L. Yetter is a strategist, advisor, speaker, and author in the field of sales and use tax. She is president and founder of YETTER Tax and founder of the Sales Tax Institute. You can find Diane on LinkedIn and Twitter.