Permanent complexity: Sales and use taxes today and tomorrow
Sales and use taxes are one of the most complex types of taxes. Rates are constantly changing, as are the goods and services they are collected on. And just to make things even more complicated and annoying, the rules behind where your client has to collect taxes, and which taxing authority they have to remit these collections to (called nexus), are often obscure or unobvious.
While many financial accounting software applications include the ability to charge and track sales and/or use taxes, these capabilities are almost always limited to a single rate. And in setting up these rate tables for your clients, you have to know which goods and services are taxable, as well as keep track of which jurisdiction your client needs to report and forward the collected taxes to. Heaven help you if they do business in multiple jurisdictions or multiple states. Even if they collect sales taxes from a single business location, it’s quite possible that they still will have to collect a composite tax made up of local and possibly regional and state sales taxes as well.
Then, if your client has an e-commerce business, things get even more complex, especially if they do business in multiple countries. That’s not even starting to take into consideration accepting and tracking certificates of non-taxable status from those customers that are tax-exempt.
A world of trouble
According to Pascal Van Dooren, chief revenue officer at indirect tax compliance solution provider Avalara, “CPA firms are encountering more clients going international, with the expectation that the firm assist with VAT and other tax compliance needs, as well as understanding and negotiating country-by-country tax collection regimes such as SPED in Brazil, and SAF-T across the EU, which give taxing authorities in those countries more comprehensive access to a company’s transaction history and general ledger. Changes on the global tax scene are occurring rapidly, and further changes over the next few years should prove challenging and exciting for tax professionals as more clients make the decision to go global.”
Vertex is also actively addressing international markets, especially those in Latin America. “Vertex Indirect Tax O Series 8.0 includes features and functions that expand users’ abilities to address increasingly complex global transaction challenges, particularly in Latin America,” vice president of tax content development John Minassian said. “Specifically, it includes Brazil flexibility and capability enhancements along with supporting content, wider support for VAT withholding taxes that involve invoice level thresholds, support of the calculations required for Argentina provincial turnover taxes, and support for Colombia UVT.”
International taxes aren’t your clients’ only concerns. “We have also seen many states work at closing the ‘online sales tax loophole’ by enacting new nexus laws often called ‘Amazon laws.’ This year alone, many states added new laws and regulations, which will increase their sales tax revenue and add the requirement for online sellers to collect sales tax in those states,” said Carl Davis, director of product management at Thomson Reuters.
But new laws and tax boundaries aren’t the only things changing, according to Vertex’s Minassian: “Everyone is interested in utilizing new technology to expand their market by expanding their services or even getting into new businesses. A great example of this is traditional content providers who are now providing streaming services. Another trend we are seeing is the increasing acceptance of cloud-based tax compliance solutions. This is especially true for the small to midsized companies that are often looking for ways to drive cost out of their compliance activities.”
Increased audits are another area that firms have to be concerned with in terms of their clients’ compliance efforts. Staying compliant with complicated tax rules is critical or your clients risk fines and penalties. Especially challenging is expanding into new regions as laws change, Vertex’s Minassian said.
According to Thomson Reuters’ Davis, “Because of the already complex laws governing use tax, we do not foresee too many new regulations being added. However, like sales tax audits, states’ opportunity to collect more tax revenue through indirect tax will also bring use tax audits into focus more in the future.”
The small aren’t immune
While most vendors address the growing needs of enterprise-sized businesses, they haven’t forgotten smaller businesses. Avalara’s Van Dooren notes that serving smaller businesses is “more important than ever, especially for smaller merchants who are now doing business online. Due in large part to the expansion of Internet commerce, the world is a much easier market to sell to as a small business. With this expansion comes a greater compliance burden as companies start doing business in more than one state (or one country). In fact, many very small businesses now find themselves with the compliance burden of big businesses as a trade-off for expanding their business reach online.”
Mike Sanders, vice president of product management at Wolters Kluwer Tax & Accounting, agreed: “Smaller clients need an easy-to-use and reliable tax solution that can support their business today and scale to address future growth.”
Vertex’s Minassian added, “The importance of sales and use tax software for smaller companies depends upon the level of activity they have in taxing jurisdictions and their aversion to risk. There are penalties and interest for non-filing and for incorrect calculations. If the likelihood of an audit is high, small companies will want to ensure that they are in compliance.”
As time goes on, almost all software evolves. That’s true in the market for sales and use tax compliance as well. All of our respondents listed improvements and extensions to their software’s features. For example, one new feature in the AvaTax platform is CertExpress, which provides tools for tax-exempt buyers to create and store compliant exemption certificates for submission in advance of and at the moment of a purchase, and allows businesses to avoid the tedious research of state-level exemption rules and changes, mitigating audit risk and ongoing resources spend.
As with the other vendors surveyed, Thomson Reuters has added new features recently. Some of these include a newly redesigned user interface that is much more intuitive and supports multiple browsers and devices (tablets/mobile) to benefit the user experience, as well as a new Exemption Certificate Management solution with form validation (to make sure the certificate is valid), reminders for expiring certificates, image storage and more.
Sovos has enhanced its reporting capabilities, including senior-level summary informational reporting, and improved the ability to manage system reconciliations and develop benchmark reporting for continual process improvement. Additionally, it has expanded access to its tax engine to allow both real-time integrations and on-demand access for batch processing of transactions. This helps complex organizations eliminate manual calculations of use tax and provides the ability to easily validate the tax treatment of purchases on vendor invoices.
Other vendors have also increased capabilities and updated usability. Wolters Kluwer’s CCH SureTax recently added a pre- and post-calculation rules engine called the DataExchange. The DataExchange provides advanced configuration options to be applied in the form of an “if/then” rules set, a feature very useful in addressing complex taxation areas, such as use tax, where numerous elements from the ERP must be evaluated in the tax decision process.
BNA Sales Tax Rates’ specific features that are particularly suited to increase productivity include address import from Excel, real-time address validation checks and formatting per U.S. Postal Services standards, tax rate and boundary validation services, customized e-mail alerts to more easily monitor rate and boundary changes throughout the month, notifications for rate updates posted after the effective date, and the ability to receive custom e-mail alerts about rate or boundary changes that affect specific locations.
Nothing stays the same
“We expect the next two years to be more of the same: more tax rate and boundary changes, an expanding tax base, more complexity around nexus and taxability rules, services and cloud computing, and more resources required to stay in compliance,” said Pat Bryant, senior product manager at Bloomberg BNA. “States and local government are still strapped for money and audits are on the rise. Plus, with the new administration and expected funding cuts, local jurisdictions will likely need to expand their tax base and push for other changes to meet their fiscal needs.”
Sovos Compliance’s vice president of tax Matt Walsh added, “In the next two years, we expect regulators to continue to invest in technology to enable complex regulatory requirements. They will require businesses to supply increasingly granular transactional data, and they will want it faster — in some cases in near-real time. Because of its significant business implications and opportunities to drive efficiencies, the discipline of tax will continue to become a more strategic function, enabled largely by cloud software.”