When Tapco, which is in the printed circuit board business, was looking to merge with a company called Circuit Supply about two years ago it was a move that not only would give the Midwest-based company a national presence but as they soon learned, also give them a level of business presence in several states that enabled those states to impose tax collection and remittance requirements on the company-known as nexus. The nexus requirements were a last-minute discovery, as is the case with all too many companies, and Tapco had to act fast. It just so happened that at that time, Roy Devadas, director of IT for the Chicago-based company known today as Tapco Circuit Supply, was attending a Great Plains conference, where he discovered Avalara.
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"In a 45-minute phone call [Avalara] had me up and running," says Devadas. Before the merger, Tapco was doing business only in Illinois and Minnesota, two states that did not consider their goods taxable because they were not complete products but components used in the development of circuit boards. However, once they completed the merger with Circuit Supply, which did business on both the West and East Coasts, they had instantly created nexus in several states that did view such products as taxable.
"It is simple to implement and fairly easy to use," says Devadas, who notes that the company recently started selling to Canada, and with just the click of a button, it was able to set the system to establish nexus in Canada. "It makes me wonder why no one thought of this before."
Tapco Circuit Supply's use of and appreciation for an automated sales tax management service is growing increasingly common. Throughout the accounting profession, accountants are realizing the significance of automated sales and use tax software. And those in the profession who have not turned to such solutions should, as industry sources agree that it is perhaps the most efficient and cost-effective way to meet the complex sales tax compliance requirements businesses face.
Furthermore, sources agree that public accountants should not be quick to assume that a company is properly handling its sales tax matters, as that may not be the case. And all too often, companies, unaware they are not in compliance, will not consult with their accountants about expansion plans until an audit is launched by some state.
"It is an under-observed tax so when it does jump up and bite, you feel you let [a client company] down," says Geni Whitehouse, vice president of U.S. strategy for Sage Software Accountants Network.
If one looks back nearly 80 years ago it is easy to see why sales tax has become such a hot button.
In the 1930s, when the sales tax was first imposed, consumers bought goods from the local merchant and it was not that difficult for the merchant to collect a few cents on the dollar. Furthermore, there were very few remote sellers, and most Americans spent very little money on services and more on taxable goods.
Fast forward a few decades to the 1970s and 1980s, when Americans began spending more money on services like medical care, health clubs, and legal and accounting services, explained Christopher Rants, Iowa House Republican Leader, during a July 2006 testimony on state and local taxation before the Subcommittee on International Trade Committee on Finance. This was then compounded by the mail order outlets selling goods without collecting sales taxes from customers-a practice sanctioned by the U.S. Supreme Court in the National Bellas Hess case in 1967 and reaffirmed in the Quill decision in 1992.
Enter e-commerce. The shift to a service-based economy and the threat to sales tax revenue that e-commerce presents today threatens the future viability of sales tax, says Rants.
In fact, a report from the University of Tennessee estimates that state and local revenue loss could be as high as $33.6 billion by 2008, of which an estimated $17.8 billion would be from sales over the Internet.
"There is increasing pressure from states to increase revenue and e-commerce has opened this whole thing up," says Whitehouse.
Looking to recoup some of that revenue, states are tightening their belts and taking such steps as increasing audits of companies that do business across jurisdictional lines. They also have developed the Streamlined Sales Tax Project (SST) in an effort to simplify and modernize sales and use tax collection and administration.
Throw into the mix the thousands of sales taxing jurisdictions that make hundreds-if not thousands-of rate and tax-rule changes each year, and there's no doubt that the complexity of sales and tax use can be extremely daunting.
According to sales tax software provider Avalara, the number of tax jurisdictions ranges from about 7,500 to 8,300, depending on who is doing the counting and what detail of special tax jurisdictions are included (e.g. police jurisdictions in Alabama). In 2006 alone, there were approximately 5,430 rate changes and 3,935 tax rule (product taxability) changes.
Bainbridge Island, Wash.-based Avalara offers a Web-based sales tax management service for small to midsize businesses that integrates with most ERP systems. Its flagship service, AvaTax, instantly calculates sales tax for clients in any of the more than 12,500 tax regions [defined as intersects of one or more taxing jurisdictions (state, county, city, special county or special city) that could be used in a tax calculation] in North America; provides detailed, real-time reporting; and automatically generates pre-populated sales tax returns. According to the company, it currently has more than 10,000 licensed AvaTax users running an average of five to seven sales tax calculation transactions through its sales tax engine every second.
AvaTax integrates with small and midsize accounting packages such as Microsoft Dynamics GP, Dynamics NAV, Intuit's QuickBooks, and Sage Software's MAS 90/200/500 and Accpac ERP. It also announced in August 2006 an alliance with Epicor Software, whereby it will integrate with Epicor's suite of ERP applications.
AvaTax links the company's centrally maintained, SST-certified sales tax engine to the user's accounting package or e-commerce system, so there's no change to a user's existing workflow.
"Sales tax is transactional and it has to happen in the moment," says Scott McFarlane, Avalara president. Today's technology, like broadband, "has allowed companies like Avalara to take powerful technology and bring it to age-old statutory requirements," he added.
Having such automation frees businesses from the burden of managing sales tax and enables them to focus their resources, which are likely already stretched thin, on revenue-generating energies.
"The most difficult aspect [in being sales tax compliant] is as you move to the edges of jurisdictions, and that is where we shine," says McFarlane. A key to the Avalara system is the ability to drill down to the zip+4 level.
In June, the company will make its Liability Worksheet an interactive report that users can view from their Administrative Dashboards. Today the report, which has been in use since last October, is emailed to clients.
Notes Kim Hayden, manager of strategic business alliances of the Mid-Market Division at Sage Software, "[Avalara] clearly is the preferred provider, and we will look to potentially deploy similar [integration] in other product lines and look for success in North America, and abroad as well."
Pasadena, Calif.-based DMI, which works with brands to create customized play lists and music programming, had only done business within California until it inked a deal with Subway restaurants in the summer of 2006.
The company teamed up with Subway restaurants to create an exclusive in-store radio network featuring customized music and messaging heard only within the restaurants. As a result, DMI had expanded its reach outside of California and into a number of states, requiring it to seek a sales-and-use tax solution. DMI, which had recently implemented Sage's MAS 200, turned to Avalara.
"[Avalara] has made our life so much easier. They are a provider for SST, so with SST it was one registration and that put us in about two dozen states, and Avalara files all of the returns for us,"says Sherilyn Lee, senior accountant at DMI. "If we had to file returns and track jurisdiction changes, I don't know what we would do."
David Clapp, senior vice president and general manager for transaction tax at Thomson Tax & Accounting, referred to sales and use tax as "the perfect storm"given its local nature, complexities, recurring monthly process and the financial risk it presents to companies.
"In addition, while Sarbanes-Oxley has ramped up requirements for well-documented internal controls, tax departments have also been under pressure to do more with less resources," says Clapp.
Looking to help professionals with compliance obligations, Thomson Tax & Accounting has among its sales tax offerings the InSource Sales and Use Tax software, which supports over 470 different sales, consumer's use, seller's use, rental, and leasing returns and is for those who want to maintain their operations in-house; and Tax Partners Managed Services, which is an outsourced option solution.