Sales & Use Tax: Lifting Compliance Burdens

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As sales and use tax compliance becomes more challenging, software vendors are beefing up their offering for tax practitioners.

by Carly Lombardo

Sales and use taxes are imposed by more than 7,500 state and local authorities, each with its own set of rules that business owners and their accountants are expected to learn, understand, and comply with, wherever they have customers.

Partner Insights

With the increased complexity of state taxes, aggressive state auditors, changes in corporate structure, and decreased staff sizes, even more challenges are surfacing.

These challenges are sparking many accounting professionals and their clients to utilize the technology offered by vendors such as RIA, Vertex, CCH, Velosant, BNA Software, and AccountantsWorld. In turn, vendors are working hard to better serve professionals by forming alliances and enhancing their current products.

For example, New York-based RIA and San Ramon, Calif.-based Sabrix recently announced the integration of RIA's InSource Sales and Use Tax return compliance software with Sabrix's Application Suite. The integration allows companies to initiate a financial transaction in legacy or ERP systems; have the Sabrix system perform all sales and use tax determination, calculation, and reporting; and complete the tax filings with a direct connection to the InSource compliance software. "Sabrix is generating an extracted file of transaction data from their program to feed InSource. The integration will allow our joint clients to take advantage of the functionality for tax determination and return compliance," says Robert Irving, product manager at Thomson/RIA.

Top 10 Most Curious Sales Tax Laws

Salem, Mass.-based Velosant, formerly TaxWare, has created a Top 10 list of sales tax laws.
These laws highlight the complexity of tax compliance for businesses.
* In Minnesota, non-edible cake decorations are taxable, but edible cake decorations are exempt.
* In Tennessee, the sale of a good is subject not only to the state sales tax of 7 percent, but a local sales tax on the first $1,600, plus an additional state sales tax of 2.75 percent on the second $1,600.
* In Illinois, cooking wine is taxable as an alcoholic beverage, even though it only contains a nominal amount of alcohol.
* In Texas, plain nuts are an exempt food, but once a candy coating is added, they become taxable.
* Missouri does not impose a state-level tax on utilities, but some localities impose a "domestic utilities tax" at a rate that is different from the local sales tax rate.
* In Rhode Island, fruit juice that is less than 100 percent pure is taxable. But cranberry juice cocktail, a mixture of juice and water or concentrate, is exempt.
* In Massachusetts, a clothing item costing up to $175 is exempt from sales tax. However, any item costing $175.01 and above is subject to the 5 percent state sales tax.
* In New Jersey, naturally carbonated water is exempt, but artificially carbonated water is taxable.
* Maryland's unique rounding rules can potentially result in the collection of a sales tax rate as high as 8 percent, instead of the statutory 5 percent.
* In Pennsylvania, state and U.S. flags are not subject to tax, but if either is sold with a pole, the entire purchase becomes taxable.

Meanwhile, Salem, Mass.-based Taxware merged with Velosant in August to offer integrated accounts payable, accounts receivable, tax calculation and compliance, and cash management. Both companies are operating units of eOne Global, and although Velosant will integrate Taxware's product offering, the Taxware brand continues as a product line under Velosant and can be purchased independently.

However, the Taxware product suite's main goal remains the same--to keep up with all law changes and accommodate all rules and rates.

"Accountants need to keep up with all changes and rules because when they miss them states can come in with audits," says Jon Abolins, vice president of government affairs at Velosant. "We strive to accommodate all law changes and rules." He provides this example of supporting specific tax rules: Clothing in many cases is exempt from state and local taxes. However, in Massachusetts, only clothing items costing up to $175 are exempt from sales tax; any item costing more is subject to a 5 percent state sales tax.

Taxware's Sales and Use had two components. The first is STEP, the Sales Tax Exemption Processing System, an exemption certificate management and tracking system that helps businesses avoid costly exemption errors through automatic handling and documentation of tax exempt sales and purchases. The second, the VeraZip module, determines taxing jurisdiction assignments. Based on ZIP codes, the system matches state, ZIP code, city, and county information to tax jurisdictions.

Expanding Possibilities

Berwyn, Pa.-based Vertex has introduced the Sales Tax O Series, and expanded the functionality of Sales Tax Q Series (formerly known as Quantum for Sales and Use Tax), by adding Vertex Analysis and Planning Solutions.

The O Series is built on a platform that supports multiple environments including Web Services, which simplifies integration to financial systems by using Extensible Mark-up Language standards.

"We wanted to make it easier for our customers to integrate the product with ERP applications as well as have a consistent user interface, which makes it easier for them to learn and operate the full suite of O Series products that include Sales Tax, Consumer Use Tax, and Value Added Tax," says product manager Keith Reiner.

The O Series automates tax processes through the use of integrated taxability management tools. It also maintains rates and rules used for calculation and offers enhanced jurisdiction identification capabilities.

Improving the tax calculation process is just the beginning with the client/server product, the Q Series, which provides customers with analysis and planning tools and exemption management tools to help set up business requirements.

For example, many companies cannot present a valid certificate on audits, and thus risk penalties. The Vertex Exemption Certificate Manager, a Web-based storage tool, automates the collection and maintenance of the sales tax exemption certificates. "We're always trying to save our users time, and once they save time, they need to show their clients what they can now do with the time. The addition of our value-added products not only helps our customers, but it reduces their clients' audits and penalties," says Mike Breeze, product manager.

Another factor that differentiates the company is Vertex Services, which provides consulting, training, and product support focused on aligning customer tax and technology resources to help minimize the time to production.

Mark Sergas, market development leader, says, "Customers often have never had to have that much interaction between tax and technology stakeholders prior to implementing tax automation products." Services include installation and testing of tax applications, configuration, and customization of tax tools and applications, along with project management and system process flow analysis, integration of tax applications with client financial systems and documentation of system configuration and internal controls.

Keeping Up with Compliance

Kim Wilmoth, a CPA at Jacksonville, Fla.-based Wilmoth and Associates, says, "Sales and use tax compliance is challenging, as it demands consistency, accuracy, and timeliness. "As companies expand their sales and operations into more states, compliance costs grow.

Also, when the economy is on a downward trend, states audit even more aggressively, which translates into an increased number of notices a company receives each month. Wilmoth also notes, "states are insisting that tax returns be submitted via electronic data interchange and tax payments via electronic fund transfer."

Sales & Use Tax Software Vendors

AccountantsWorld
Hauppauge, N.Y.
(800) 829-7354
www.accountantsworld.com

BNA Tax Management
Washington, D.C.
(202) 833-7240
www.bnasoftware.com

CCH Sales Tax Group
Chicago, Ill.
(888) 224-7377
www.salestax.com

RIA Compliance
Carrollton, Texas
(800) 865-5275
www.riahome.com

Sabrix
San Ramon, Calif.
(925) 543-0110
www.sabrix.com

Velosant
Salem, Mass.
(978) 741-0101
www.taxware.com

Vertex
Berwyn, Pa.
(800) 355-3500
www.vertexinc.com

This means firms must streamline sales and use tax compliance and return filing for their clients. Wilmoth also feels it is vital to cover the complete sales and use tax process. "Clients want to direct their attention to the business's core competencies and strategic direction rather than the complexities of sales and use tax," she says. "Firms must remember the process is much larger in scope than the preparation of the tax returns."

Wilmoth breaks the process into the following 10 areas:

* Creation and management of the taxability matrix.

* Determination and preparation of state and local registrations.

* Determination of available technology.

* Structuring and testing of data feeds.

* Preparation of the tax returns and payments and remittance of each.

* Management of resale and exemption certificates.

* Management of tax notices.

* Creation of an audit trails.

* Management of the tax function.

* Management of audits.

Serving Users

BNA Software agrees that accounting firms support end users in number of ways, and not just with rates and compliance. According to Susan Jones, marketing communications manager, consulting is an important way for firms to help their clients.

"Accounting firms often do a nexus, taxability, and risk analyst on sales and use tax, and they advise clients where to locate and how to set up financial systems for their business," Jones says. Also, accounting firms advise clients about how to integrate sales tax rates into point-of-sale systems, and often keep clients abreast of sales and use tax issues of importance.

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