Complying with indirect tax obligations presents a significant challenge due to the diverse taxability determinations across the U.S. states and the existence of thousands of tax rates. The manual preparation and filing of tax returns in multiple states can be an arduous and error-prone task. Furthermore, this manual approach means that a business is unable to automatically track and be alerted when its sales activities exceed a state's nexus thresholds, nor does a manual approach keep pace with changing tax rates or provide an alert about the need to renew exemption certificates. The inability to track whether a company’s purchases are taxable or exempt also may lead to inaccurate tax reporting.
Indirect tax automation offers a solution that enhances efficiency and improves compliance. While this article focuses on sales and use tax (SUT), automation can streamline the management of other types of indirect taxes and fees, including gross receipts taxes, VAT, goods and services tax (GST), utility taxes, excise taxes, telecommunications taxes, food and beverage taxes, hotel taxes, lease taxes and regulatory recovery fees. This article outlines the key steps for the successful implementation of an automated compliance solution, including selecting the right solution for your business, executing implementation and testing, and ensuring effective post-deployment maintenance and support.
Various situations may lead to the need for automation.
Companies engaged in e-commerce or digital sales, even with just a few hundred thousand dollars in sales across U.S. states, have likely established economic nexus and consequently have compliance obligations in at least a few states. The presence of employees or independent agents providing services on behalf of the company and having office space and inventory may further expand a company’s nexus footprint. The ease of establishing nexus requires the company to know and understand the taxability of its revenue streams and have the ability to accurately collect tax in jurisdictions with varying state, district and local rates. This task is nearly impossible without reliance on indirect tax automation tools.
Accounting departments within companies often face resource constraints and may lack the capacity to hire a dedicated team to manage monthly sales tax obligations. Personnel changes can disrupt the consistency of these processes, potentially resulting in unfiled returns or inaccurate calculations. Automation ensures the continuity of return preparation and filing, even amidst staff turnover, while preserving historical compliance knowledge.
Companies relying on “home-grown” systems should carefully evaluate the advantages of transitioning to a commercial solution. Frequent audits, the need for refund claims and the maintenance of large tax reserves often signal inefficiencies within the current tax process. By effectively leveraging technology for historic data collection and analysis, nexus review, taxability determination, sales sourcing and the maintenance of exemption certificates, businesses can streamline audits through comprehensive and organised records. This facilitates quick access to relevant information, helps to create a more sustainable compliance strategy and reduces the likelihood of errors or discrepancies. Furthermore, a technology solution can be employed to review, test the necessity of and update tax reserves, confirming they are appropriately managed. Lastly, during the due diligence process, a company with a sales tax engine has the ability to quickly respond to queries about its nexus and taxability determinations, share past filings and provide documentation related to exempt customers.
Automation can also be leveraged to track and review purchases to determine their taxability, an invaluable feature during large capital expenditure projects where sales tax spend can be substantial. In cases where sales tax is not paid on taxable purchases, the system can assist in calculating use tax at the appropriate rate, helping to avoid both the underpayment and overpayment of taxes.
A change in legal entity structure or merger and acquisition activity can lead to redundancy when multiple ERP systems or sales tax compliance tools converge into a single entity, necessitating the migration of information from one system to another. Implementing a new ERP system or upgrading an existing system offers an opportunity to evaluate which automation solution best aligns with the company's current structure and growth vision. This process not only streamlines operations but also helps to verify that the chosen solution supports the company's strategic objectives and scalability needs.
Once the business case for SUT automation has been developed, it is crucial to communicate with key stakeholders, including finance, tax, IT and operations (procurement and sales). This collaborative effort will help to make certain that various inputs are considered in determining the project scope, timeline, required resource commitment, preferred technology and the best partner to assist with the implementation.
The finance, tax and IT departments must understand the total costs associated with transformation, which includes software licensing, implementation support and ongoing maintenance. Licensing costs may vary depending on transaction volume, company revenue, integration capabilities with existing ERP systems and other metrics that can change annually. Therefore, it is essential for finance and tax to understand the expected costs for the initial year and anticipate future expenses. The tax department should also gather vital information regarding the company's revenue streams, filing requirements, SUT calculations, accrual procedures, exemptions and purchasing activities. The tax department should share results of prior audits and refund claims identifying key area points that should improve through automation.
The IT department should evaluate how the sales tax software integrates with the organisation's ERP system and aligns with the overall IT strategy. This includes addressing any data security and compliance requirements upfront to verify that they are compatible with the software's capabilities, industry standards and company policies. Understanding the availability of IT resources is also crucial for successful integration, as it allows for the proper allocation of skilled personnel to the project.
Operations should describe the company's procurement functions and decisions related to sales tax payments on purchases or the accrual calculation of use tax. In cases where procurement is decentralised, each location may have its own purchasing procedures and methods for reviewing invoices for tax purposes. Additionally, assets purchased in one location but used in another state may not account for differences in tax treatment or rates.
On the sales side, it is important for operations to share information with the tax department to compare the states where the company files tax returns to those where it has operations. The company may have nexus in several states but has not been filing returns, or it has introduced new taxable products without collecting sales tax or sold taxable products to exempt customers without obtaining the necessary exemption certificates. Operations and tax departments must collaborate closely to identify issues that may have created past exposure, rectify them and find solutions that may automate and prevent similar problems from arising in the future.
With numerous stakeholders involved, implementing an indirect tax solution requires a collaborative effort and strong project management. From the outset, it is crucial to determine who will assume the project management role to guide the relevant teams in adhering to deadlines and achieving desired outcomes. The company's tax department should consider partnering with a third-party implementation partner, such as indirect automation tax specialist or accounting firm, to guide the company to an end-to-end implementation. These projects can be time-consuming and the tax department's resources may already be constrained.
An implementation partner can assist the company by managing or co-managing the project, facilitating communication with stakeholders, assigning responsibilities and monitoring deadlines. This partnership can help bring a project to fruition, leveraging the consultant's expertise and allowing the tax department to focus on its core responsibilities.
A successful implementation should be managed through the following five phases of the project:
The company should define the geographical scope of the project, which impacts the taxes involved. For instance, if the scope is limited to the U.S., the focus may be only on SUT; however, if the scope includes Canada, the company may also need to incorporate GST/Harmonised Sales Tax and local taxes.
The company should consider its current size, business lines and future growth plans to ensure that the chosen software solution is scalable. If the company plans to transition from wholesale to direct-to-consumer sales, launch an online platform or begin selling through marketplace platforms or have an increased volume of transactions, these initiatives should be included in the system's design and configuration. Such plans may also affect software and support costs, which should be carefully evaluated during the decision-making process.
During the scoping and as part of the software selection process, the company should consult with an experienced integration partner. This partner can provide insights into the benefits and any potential shortcomings of available solutions. They can also facilitate communication with stakeholders, including ERP support teams and software vendors, regarding desired requirements. Additionally, the integration partner can help identify steps and enhancements needed to effectively meet the company's expectations.
The company should identify all in-scope processes for sales and purchases and which processes will include a tax determination. These will be included in a requirements document that sets out the necessary master data, process changes, tax variations, and reporting and compliance.
This phase of the project involves determining the company's revenue streams and mapping them into the software system. To achieve this, a comprehensive review of all the company's products and services is necessary, examining how they are described on the website, in contracts, invoices, and terms and conditions. Consistency in the description of revenue streams, both internally and publicly, is crucial for accurate system mapping. Any discrepancies in the characterisation of revenue streams should be resolved before mapping them into the system, as inconsistencies can lead to incorrect taxability results.
During this phase, companies may discover they have nexus in additional states where they conducted taxable sales or made purchases without timely self-accruing and remitting use tax. Before activating the tax engine in these states, it is important to assess and consider the materiality of any exposure. This exposure can potentially be mitigated through voluntary disclosure programs, state tax amnesty or negotiated settlement programs, or by filing late returns and requesting abatement of penalties.
For certain scenarios, additional data will need to be passed from the ERP. The details will be outlined in the solution design to be passed in the technical integration.
In addition, configuration of the ERP or billing / procurement system may be required to enable tax determination. If the technical integration requires development, the software vendor or implementation partner can help to integrate the tax software into the ERP to communicate flawlessly.
Business users are included to conduct end-to-end testing and confirm that different variations of the processes are evaluated and that data is available for reporting and compliance. All issues should be documented and rectified before going live.
After the go-live date, there is a post-production period where the software implementation team will be available to provide support and address any post-live issues that may arise. Stakeholders should hold periodic meetings to discuss how evolving business needs can be accommodated by the software system and whether any changes are necessary. Additionally, the software system should undergo annual checks and testing to identify and rectify any abnormalities, verifying its continued effectiveness and alignment with the company's requirements.
By understanding the triggers for indirect tax automation and carefully planning its implementation, organisations can achieve significant improvements in efficiency and compliance. With the right approach, businesses can navigate the complexities of tax regulations with confidence and precision.
Angela Acosta
Ilya Lipin
BDO in United States
Indirect tax automation offers a solution that enhances efficiency and improves compliance. While this article focuses on sales and use tax (SUT), automation can streamline the management of other types of indirect taxes and fees, including gross receipts taxes, VAT, goods and services tax (GST), utility taxes, excise taxes, telecommunications taxes, food and beverage taxes, hotel taxes, lease taxes and regulatory recovery fees. This article outlines the key steps for the successful implementation of an automated compliance solution, including selecting the right solution for your business, executing implementation and testing, and ensuring effective post-deployment maintenance and support.
Business Case for Indirect Tax Automation
Various situations may lead to the need for automation.Companies engaged in e-commerce or digital sales, even with just a few hundred thousand dollars in sales across U.S. states, have likely established economic nexus and consequently have compliance obligations in at least a few states. The presence of employees or independent agents providing services on behalf of the company and having office space and inventory may further expand a company’s nexus footprint. The ease of establishing nexus requires the company to know and understand the taxability of its revenue streams and have the ability to accurately collect tax in jurisdictions with varying state, district and local rates. This task is nearly impossible without reliance on indirect tax automation tools.
Accounting departments within companies often face resource constraints and may lack the capacity to hire a dedicated team to manage monthly sales tax obligations. Personnel changes can disrupt the consistency of these processes, potentially resulting in unfiled returns or inaccurate calculations. Automation ensures the continuity of return preparation and filing, even amidst staff turnover, while preserving historical compliance knowledge.
Companies relying on “home-grown” systems should carefully evaluate the advantages of transitioning to a commercial solution. Frequent audits, the need for refund claims and the maintenance of large tax reserves often signal inefficiencies within the current tax process. By effectively leveraging technology for historic data collection and analysis, nexus review, taxability determination, sales sourcing and the maintenance of exemption certificates, businesses can streamline audits through comprehensive and organised records. This facilitates quick access to relevant information, helps to create a more sustainable compliance strategy and reduces the likelihood of errors or discrepancies. Furthermore, a technology solution can be employed to review, test the necessity of and update tax reserves, confirming they are appropriately managed. Lastly, during the due diligence process, a company with a sales tax engine has the ability to quickly respond to queries about its nexus and taxability determinations, share past filings and provide documentation related to exempt customers.
Automation can also be leveraged to track and review purchases to determine their taxability, an invaluable feature during large capital expenditure projects where sales tax spend can be substantial. In cases where sales tax is not paid on taxable purchases, the system can assist in calculating use tax at the appropriate rate, helping to avoid both the underpayment and overpayment of taxes.
A change in legal entity structure or merger and acquisition activity can lead to redundancy when multiple ERP systems or sales tax compliance tools converge into a single entity, necessitating the migration of information from one system to another. Implementing a new ERP system or upgrading an existing system offers an opportunity to evaluate which automation solution best aligns with the company's current structure and growth vision. This process not only streamlines operations but also helps to verify that the chosen solution supports the company's strategic objectives and scalability needs.
Identifying and Inviting Stakeholders to an Indirect Tax Automation Project
Once the business case for SUT automation has been developed, it is crucial to communicate with key stakeholders, including finance, tax, IT and operations (procurement and sales). This collaborative effort will help to make certain that various inputs are considered in determining the project scope, timeline, required resource commitment, preferred technology and the best partner to assist with the implementation.The finance, tax and IT departments must understand the total costs associated with transformation, which includes software licensing, implementation support and ongoing maintenance. Licensing costs may vary depending on transaction volume, company revenue, integration capabilities with existing ERP systems and other metrics that can change annually. Therefore, it is essential for finance and tax to understand the expected costs for the initial year and anticipate future expenses. The tax department should also gather vital information regarding the company's revenue streams, filing requirements, SUT calculations, accrual procedures, exemptions and purchasing activities. The tax department should share results of prior audits and refund claims identifying key area points that should improve through automation.
The IT department should evaluate how the sales tax software integrates with the organisation's ERP system and aligns with the overall IT strategy. This includes addressing any data security and compliance requirements upfront to verify that they are compatible with the software's capabilities, industry standards and company policies. Understanding the availability of IT resources is also crucial for successful integration, as it allows for the proper allocation of skilled personnel to the project.
Operations should describe the company's procurement functions and decisions related to sales tax payments on purchases or the accrual calculation of use tax. In cases where procurement is decentralised, each location may have its own purchasing procedures and methods for reviewing invoices for tax purposes. Additionally, assets purchased in one location but used in another state may not account for differences in tax treatment or rates.
On the sales side, it is important for operations to share information with the tax department to compare the states where the company files tax returns to those where it has operations. The company may have nexus in several states but has not been filing returns, or it has introduced new taxable products without collecting sales tax or sold taxable products to exempt customers without obtaining the necessary exemption certificates. Operations and tax departments must collaborate closely to identify issues that may have created past exposure, rectify them and find solutions that may automate and prevent similar problems from arising in the future.
How to Successfully Implement an Indirect Tax Solution
With numerous stakeholders involved, implementing an indirect tax solution requires a collaborative effort and strong project management. From the outset, it is crucial to determine who will assume the project management role to guide the relevant teams in adhering to deadlines and achieving desired outcomes. The company's tax department should consider partnering with a third-party implementation partner, such as indirect automation tax specialist or accounting firm, to guide the company to an end-to-end implementation. These projects can be time-consuming and the tax department's resources may already be constrained.An implementation partner can assist the company by managing or co-managing the project, facilitating communication with stakeholders, assigning responsibilities and monitoring deadlines. This partnership can help bring a project to fruition, leveraging the consultant's expertise and allowing the tax department to focus on its core responsibilities.
A successful implementation should be managed through the following five phases of the project:
- Planning and Requirements Analysis
The company should define the geographical scope of the project, which impacts the taxes involved. For instance, if the scope is limited to the U.S., the focus may be only on SUT; however, if the scope includes Canada, the company may also need to incorporate GST/Harmonised Sales Tax and local taxes.
The company should consider its current size, business lines and future growth plans to ensure that the chosen software solution is scalable. If the company plans to transition from wholesale to direct-to-consumer sales, launch an online platform or begin selling through marketplace platforms or have an increased volume of transactions, these initiatives should be included in the system's design and configuration. Such plans may also affect software and support costs, which should be carefully evaluated during the decision-making process.
During the scoping and as part of the software selection process, the company should consult with an experienced integration partner. This partner can provide insights into the benefits and any potential shortcomings of available solutions. They can also facilitate communication with stakeholders, including ERP support teams and software vendors, regarding desired requirements. Additionally, the integration partner can help identify steps and enhancements needed to effectively meet the company's expectations.
The company should identify all in-scope processes for sales and purchases and which processes will include a tax determination. These will be included in a requirements document that sets out the necessary master data, process changes, tax variations, and reporting and compliance.
- Solution Design
This phase of the project involves determining the company's revenue streams and mapping them into the software system. To achieve this, a comprehensive review of all the company's products and services is necessary, examining how they are described on the website, in contracts, invoices, and terms and conditions. Consistency in the description of revenue streams, both internally and publicly, is crucial for accurate system mapping. Any discrepancies in the characterisation of revenue streams should be resolved before mapping them into the system, as inconsistencies can lead to incorrect taxability results.
During this phase, companies may discover they have nexus in additional states where they conducted taxable sales or made purchases without timely self-accruing and remitting use tax. Before activating the tax engine in these states, it is important to assess and consider the materiality of any exposure. This exposure can potentially be mitigated through voluntary disclosure programs, state tax amnesty or negotiated settlement programs, or by filing late returns and requesting abatement of penalties.
For certain scenarios, additional data will need to be passed from the ERP. The details will be outlined in the solution design to be passed in the technical integration.
- Tax System Policy Configuration
In addition, configuration of the ERP or billing / procurement system may be required to enable tax determination. If the technical integration requires development, the software vendor or implementation partner can help to integrate the tax software into the ERP to communicate flawlessly.
- Testing
Business users are included to conduct end-to-end testing and confirm that different variations of the processes are evaluated and that data is available for reporting and compliance. All issues should be documented and rectified before going live.
- Product Cutover and Solution Support
After the go-live date, there is a post-production period where the software implementation team will be available to provide support and address any post-live issues that may arise. Stakeholders should hold periodic meetings to discuss how evolving business needs can be accommodated by the software system and whether any changes are necessary. Additionally, the software system should undergo annual checks and testing to identify and rectify any abnormalities, verifying its continued effectiveness and alignment with the company's requirements.
BDO Insights
By understanding the triggers for indirect tax automation and carefully planning its implementation, organisations can achieve significant improvements in efficiency and compliance. With the right approach, businesses can navigate the complexities of tax regulations with confidence and precision.Angela Acosta
Ilya Lipin
BDO in United States