Leveraging Software for Sales Tax Compliance
Sales tax collection can be one of the most daunting tasks in operating a business. But software can provide some relief.
New Jersey’s general sales tax guide contains over 30 pages of guidance listing various items that are either taxable or non-taxable. Often, an item will not even be on the list, leaving CPAs to interpret the other items on the list and apply it to the item. CPAs also sometimes receive unofficial guidance from state auditors during a routine audit. In some cases, without a ruling from the tax director, the unofficial guidance may not be enough.
As states continue to adapt to the Wayfair court case ruling, it can feel next to impossible to stay on top of sales tax law. In addition to staying up to date on the law, businesses also need to collect, file and remit sales tax to the various states in which they operate. Fortunately, there are various apps to help automate the sales tax filing and collection process.
Things to Consider
When evaluating the various software options, keep the following in mind:
- Free trial and initial set up. When looking to implement any software, it’s important to do research. Almost all apps provide a free trial so users can get the hang of the app before implementing it for everyday operations. Sales tax software can be bulkier depending on how many items or services the company sells, so setup is key. Whether fully implementing the software or just doing the free trial, there will be an initial process that must be completed. If the software is set up wrong, it can create a bigger mess than not using the software at all. Prior to finalizing the software choice, see if there is an onboarding team that can help with the set up.
- Integrations. To fully automate, the software needs to integrate into the company’s app stack. While there will be some initial manual setup, overall the only ongoing manual input should be when setting up new products or services. The three integrations that should be considered are the e-commerce stores, invoicing/payment software and accounting. Each integration needs to be thoroughly tested to prevent errors while the app is live. If, during operation, the app has an error, it could miss transactions or even prevent the processing of sales.
- Learning center and live events. With any software it is important to see what kind of guidance or learning center is available to stay up to date on any software changes. Live or recorded webinars offer the ability to work through a problem or scenario. Live events offer a more diverse community base to connect with other users. Hearing other users’ challenges and success stories can be very beneficial.
- Customer service. The biggest selling point of any software besides pricing should always be customer service. When an issue or problem arises, waiting hours or even a day could make or break a business. For some tax professionals, it could mean keeping or losing a client while trying to problem solve with them. Although many vendors will say they have 24/7 support, unless there is a live chat or phone hotline always available, response time could be delayed. Often the live chat feature can be a lifesaver. Even more important, though, is whether the vendor provides their own support or outsources it. Outsourced support and agents are often limited to scripts or knowledge-base articles. Ideally, the support team will be able to problem solve or provide temporary solutions while they work to provide a permanent fix.
- Pricing. Each software package will offer various pricing tiers that may fit certain clients. In some instances, if the pricing is based on the number of transactions, a high-dollar, low-volume client may not be able to use the software package. The various tiers may provide different features, and the cost per state filings can vary. When considering a package, it is important to plan for the future as well, in case the need arises to add another state or add more products. At the end of the day, while the software needs to be a good fit for a business, the business also needs to be a good fit for the software company.
- Wishful thinking. A common misconception is that sales tax compliance software will automatically identify what is and isn’t taxable. Unfortunately, there most likely will always be some human interaction required to verify what is and is not taxable. Businesses will still be required to keep up to date on the current tax laws for each state and maintain their product and service list. At the same time, sales tax is often considered a trust fund tax, which means business owners will need to know the law or can be held personally responsible for the tax. Those companies that use software to automate the process will most likely still need to work to decide what is and isn't taxable.
Popular Software Options
Three key players in the sales tax automation world are:
- Taxify (taxify.co)
- Avalara (avalara.com)
- Taxjar (taxjar.com)
At their core, each solution will essentially accomplish the same thing. While it may be tempting to pick the low-cost software package, it is important to evaluate how the software integrates with the rest of the company’s app stack. Some may not integrate smoothly or may require some manual work. At the same time, some software options may not be a good fit based on the business’s overall operations or a client’s technological skill set. Much like any business decision, before committing to any one solution, all options should be considered thoroughly. Ultimately, if the sales tax is filed incorrectly, the blame typically falls on the taxpayer.
This article appeared in the July/August 2020 issue of New Jersey CPA magazine. Read the full issue.