Sales tax is a consumption tax imposed by a taxing jurisdiction on the sale of certain goods and services. Just a few years ago, only those companies with a physical presence in a state were required to collect and remit sales tax in that state. The Wayfair Supreme Court ruling, however, allowed states to require companies with an economic presence (not just a physical presence) to collect and remit sales tax on transactions deemed taxable by the state. The court decision has resulted in a significant burden on company finance teams to keep up with and comply with the changing rules.
Greater Complexity Frustrating Finance Teams
Every state has its own definition of what constitutes an “economic presence” and each state determines which products or services are taxable or exempt. With over 11,000 taxing jurisdictions in the U.S., many finance departments are struggling to keep up and are worried about the risk of getting it wrong. As businesses get increasingly frustrated by the challenge of conducting their sales tax compliance in house, many are exploring two external solutions:
- Sales tax automation software
- Outsourcing their sales tax function
Most software solutions claim they can take the compliance function completely off your plate, but we’ve found this is rarely the case. Below are 9 sales tax software shortcomings.
1. No Taxability Determinations
Limitation: Sales tax software can’t make taxability determinations for you. Rather, the software provides a long list of categories that you must use to characterize your products and services yourself.
Solution: An outsource provider can advise you on how your products and services should be categorized and where they are taxable. They can research the laws in a particular state and do a state-by-state analysis. For example, one state may characterize a piece of software as tangible personal property, while another state may consider it to be a service, and still another a digital product—all of which could be treated differently from a sales tax perspective.
2. Unusable Nexus Studies
Limitation: Economic nexus is created when your business establishes an economic connection to a particular state, usually defined by a sales dollar or transaction number threshold. Because sales tax software packages can’t perform taxability determinations, they can’t provide usable nexus studies. While many claim they can, their studies are based on the taxability determinations that their clients have made, which weren’t reviewed by a sales tax expert. If products and services aren’t categorized correctly, a nexus study could lead a business to register and collect in a state where it has no taxable sales or not to register in a state where it does have taxable sales. Either way, it allows for mistakes.
Solution: An outsource sales tax provider can work with you to analyze your products and services to make sure they are categorized correctly in each state. Once taxability is determined for all goods and services, your provider will then analyze your taxable sales in each state to determine which states you have established (or are approaching) economic nexus.
3. Unanswered Legal/Compliance Questions
Limitation: A sales tax software provider can answer questions or help with the use of their software, but they typically won’t answer legal or compliance questions for liability reasons.
Solution: An outsource provider provides legal and compliance assistance. Most are even willing to take on the liability. Sales tax advisors have years of experience in the industry, so they understand the problems, questions and issues you may face, and can offer solutions.
4. No Accuracy Check for Sales Tax Returns
Limitation: Sales tax software solutions cannot check your returns to make sure everything is correct. The accuracy of the returns is based on the taxability determinations made by their client. If those determinations are incorrect, the returns won’t be accurate.
Solution: Accurate taxability determinations are critical to your sales tax compliance process. Without them, you can’t make accurate nexus determinations and you can’t ensure your sales tax returns are calculated and filed correctly. An outsourcing provider can do a sale-by-sale analysis to make sure taxability determinations and calculations are correct.
5-6. Accurate Return Filing & Rate Determinations Depend on Accurate Inputs
Limitation: Sales tax software solutions do a good job of making rate determinations and filing tax returns, assuming the taxability and other information is input correctly. These are software’s strengths. These outputs, however, are only as good as the inputs (taxability determinations) provided in the software – and that’s where most software solutions fall short.
Solution: Outsource sales tax providers can provide the expertise and advice that software solutions cannot. Expert providers ensure both inputs and outputs are accurate, which minimizes risk to your organization.
7-9. Pricey Software Subscriptions, Onboarding & Implementation
Limitation: With any type of software installation, there are subscription, onboarding and implementation issues. The software itself is expensive, and users are typically locked into a contract. What if the software doesn’t perform the way it was expected? Companies are stuck with it until the contract period has passed. Additionally, onboarding and implementation are often burdensome and expensive, taking valuable resources and interrupting client systems.
Solution: An outsource sales tax provider can assume responsibility for your entire sales tax process. There are no software contracts or subscriptions to deal with, and the resources needed for onboarding and implementation are minimal. Most of the heavy lifting is performed for you and there is little intrusion to your daily business.
Outsource vs. Software Summary
| Outsource Solution | Software Solution | |
|---|---|---|
| Taxability Determinations | Yes | No |
| Usable Nexus Study | Yes | No |
| Legal/ Compliance Questions Answered | Yes | No |
| Returns Checked | Yes | No |
| Returns Filed | Yes | Yes |
| Rate Determinations | Yes | Yes |
| Onboarding | Minimal | $$$ |
| Software Subscription | No | Yes |
| Software Implementation | No | Yes |
Why Outsource Your Sales Tax Function?
Benefits of outsourcing include:
- Reduced risk. Outsource providers will analyze and accurately characterize your products and services on a state-by-state basis, minimizing errors. They will also track your transaction activity in each state to determine when you are approaching nexus thresholds. All of this reduces risk to your organization and minimizes the likelihood of an audit.
- Reduced time. Outsource providers will streamline your sales tax function, freeing up your finance team to spend more time on strategic and value-added activities.
- Reduced cost. Cost savings could come in a number of forms including reduced staffing and overhead, elimination of payment errors and penalties, and onboarding and training expense resulting from turnover in your in-house sales tax compliance staff.
How CSH Can Help
Outsourcing your sales tax function to CSH puts the compliance burden and responsibilities in the hands of our sales tax experts. Our team with work with you to:
- Identify and resolve your sales tax exposure
- Confirm or correct taxability and rate determinations
- Assume control of your compliance process
- Create audit-ready files
- Monitor nexus and advise on new products and services
Contact us today to talk to one of our sales tax experts. We’ll discuss the specific sales tax challenges and issues you are facing, as well as solutions our outsource team can provide to help reduce your risk and ease your burden.
