The Sales and Use Tax Forest (Link to Article)
By Paul Demery
Integration between sales and use tax software and ERP systems has become crucial for businesses as they expand nationwide and must handle large numbers of taxing jurisdictions.
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In fact, it would be almost unworkable, says Celia Knowles, CPA, a principal of Wong & Knowles, based in Elmhurst, Ill.
"One of my clients needed to handle sales taxes on their sales throughout the U.S., and without Avalara's AvaTax sales and use tax software, it would have had to create hundreds of sales tax schedules in its MAS 200 accounting software for the various states, counties, and cities," she says. "And they would have had to know which tax schedule to select for a particular state."
Without integrated software, she adds, the client's efforts to gather the right data would have been fraught with errors, since in many cases it would not know the county or other local taxing jurisdiction its customers were in.
"The client could select the wrong sales tax schedule," Knowles says.
That's the world of sales and use taxes, where the job of calculating, reporting, and remitting levies is more challenging than ever. And as businesses grow beyond their initial geographic markets, they take on more liabilities from countless taxing jurisdictions, state, and local taxing bodies. That increases the pressure on business to sharpen their pencils to figure, collect, and remit more tax revenue.
A century ago, when state governments started requiring businesses to collect and remit sales and use taxes on transactions, interstate commerce was a relatively quiet affair untouched by today's forces of interstate highways, air transport, and the Internet.
Even businesses were capable of handling sales and use taxes in the early 1900s, they certainly wouldn't be capable of it today. Indeed, while today about 98 percent of businesses do pay sales taxes, only about 65 percent do all that it takes to pay use tax on purchases, says Larry Wilkie, director of the corporate and sales tax division of the Minnesota Department of Revenue.
Fortunately, the software tools for handling tax responsibilities continue to evolve, perhaps finally catching up with the challenges posed by sales-and-use tax liabilities, which have mushroomed into a web of several thousand taxing jurisdictions in the U.S. alone. Throw in international commerce, and value-added taxes represent even more obstacles.
Vendors of sales and use tax software, meanwhile, are leveraging Web-integration technology to provide new levels of capabilities in managing tax liabilities faster and more accurately-whether on a company's own servers or in a Web-hosted environment. More vendors are building integration between sales and use tax software and accounting software within back-end ERP application suites, enabling accountants to automatically push and pull the necessary data between multiple software applications; and more vendors are providing the ability to comply with new tax rules being formed by the states involved in the Streamlined Sales and Use Tax Project. (See related story, page 42.)
New or expanded software functionality also extends into areas such as international taxes, with several vendors offering increased capability in handling value-added tax responsibilities.
Supporting International Operations
Taxware, a Wakefield, Mass.-based division of First Data Corp., offers a sales and use tax system that automatically calculates taxes for sales, purchases, and rentals, and serves as an end-to-end tax-calculation and remittance packages. Many of its users file taxes monthly, and the system allows them to automatically extract data from a previous month to populate data fields for the current month's form.
The company recently upgraded its Taxware Enterprise edition, which can now handle VAT and other consumption taxes for 150 countries.
To better support international operations, the application provides forms in seven foreign languages. "Our tax returns for the European Union are now all in native languages, so users don't have to worry about a translation loss of data," says Tim Walsh, director of product management and application support.
The Enterprise edition provides about 10 standard reports that include transactional analysis, summary data, and analysis by day, week, and month. Users can drill down to the invoice and vendor levels, run reports on particular vendors and invoices and see what was purchased, and make sure that the tax was properly calculated.
Pushing SST
The Streamlined Sales Tax Project continues to work on issues to finalize a common system of calculating sales and use tax on goods sold across state borders.
The most pressing issue, which the SST Governing Board planned to address last month was, is an amendment presented by Ohio and Texas, according to board president Scott Peterson. The SST calls for companies without a physical presence in the buyer's state to collect tax on behalf of the buyer's state at that state's sales tax rate under the "destination-based sourcing" system. But Ohio and Texas want a dual system that would allow them to keep their "origin-based sourcing" system of collecting on behalf of the seller's state. Businesses complain the Ohio and Texas amendment would overly complicate instead of simplifying sales tax collection.
The SST Project is also planning to soon name four certified software providers of sales-and-use tax applications this spring, Peterson says. The software, free to users, will be paid for out of collected tax revenue. "The CSPs will be paid a percentage of the tax they collect from sellers," he says, noting that the percentage will decline as the amount of collected tax increases.
Following are status reports of several remaining issues, according to CCH:
Audits. Businesses have expressed concerns that state tax officials could audit purchasers after states have already audited sellers, raising the possibility of issues related to inconsistent records between sellers and purchasers. The audit process has yet to be settled, but states have agreed to include businesses in defining the process. Businesses have suggested that the Governing Board issue a master list of audited SST sellers, then remove transactions involving those sellers from any purchaser use tax audits.
Taxability matrix. Businesses have called for a supplementary matrix with additional details from each state, so that businesses will be less likely to be held liable for tax when they are uncertain about taxability. There is some objection from states, however, over removing liability for products that would still fall within a gray area of taxability.
Exemption certificates. At a recent SST meeting one accountant suggested that any state audits involving records of purchasers' sales tax exemption certificates should be conducted within 14 weeks of the purchase-coinciding with the amount of time that retail locations usually retain those records and eliminating the need for businesses to computerize those records.
As are most vendors, Taxware is working to keep up with changes in the SST, and has developed a product matrix to show tax rules for different items for each of the 19 states involved in the SST program.
To provide audit trails, Taxware stores transaction and sales data in customer records and a sales tax general ledger. "The system can make a determination based on data elements whether or not a transaction was a taxable sale or an exempt purchase, and which general ledger the data should be sent to," Walsh says.
Focus on SMBs
While focused mostly on Fortune 1000 companies, Taxware began partnering with Avalara late last year to give small and midsized business users of AvaTax software access to Taxware's own system for managing international tax.
"We're using their international rates in our engine to deliver the tax rates of 150 countries in our AvaTax Global Edition product," says Avalara president Scott McFarlane.
Avalara, based in Bainbridge Island, Wash., is also expanding its use of Web integration to expand other services for SMB companies.
"Sales tax automation is a perfect application of Web services," McFarlane says. "Anyone can find rates, but what's important is how you take those rates and integrate them into accounting packages and automate calculation and compliance."
Avalara, which calculates sales tax for the more than 8,000 taxing jurisdictions in the U.S., integrates with accounting packages such as Sage Software's MA S90/200, MAS 500, and Accpac ERP, Epicor's iScala, Dynamics GP (formerly known as Great Plains) and Dynamics NAV (formerly Navision) for its largest clients, plus QuickBooks and Peachtree for smaller ones. It calculates taxes based on location, down to the Zip+4 level.
Most Avalara customers use the Web-based software-as-a-service option. But Avalara also offers end users the option to run its software on their own servers or to use the software development kit version, which is designed particularly for e-commerce clients.
Avalara recently released AutoReturn, which lets users click a button in the AvaTax Dashboard to automatically send tax calculation data into returns forms for more than 2,000 state and local taxing authorities.
The company is also offering Taxware's TaxSolver as an AvaTax add-on for meeting data records compliance under Sarbanes-Oxley, and it plans to launch an automated tax remittance tool this year. As an extra service, the Avalara Web site features a sales tax calculator that allows visitors 50 free transactions per month.
More Integration
Also expanding integration between its sales and use tax software with mid-market financial applications is Riverwoods, Ill.-based CCH. "We're now making it easier to integrate ERP systems," says Bruce Krumlauf, product manager for sales and use tax products.
In three main initiatives this year for its CertiTax sales and use tax software, a Web-based subscription application, two are new toolsets geared for integrating with four accounting/ERP applications: Microsoft Dynamics GP, NAV, and SL, and Sage Accpac ERP.
One initiative, an integration toolset, loads tax-rate data directly into the ERP systems of clients like manufacturers who have relatively unchanging product lines and customer bases. The other provides more dynamic updates of taxability tables for clients, such as retailers, who have frequently changing products and customers.
"In a one- or two-click process, users can pull in updated rate information each month, so they can be assured they have current tax rates for states in which they have nexus," Krumlauf says.
The third initiative will be a new sales-tax-calculation engine integrated with CCH's ZIPSales Returns application to make it compatible with the SST Project. The combination of CertiTax and ZIPSales Returns lets users electronically send tax-calculation data to forms for schedules, worksheets, and tax returns.
Although CCH is not currently up for review as a certified software provider by the SST's Governing Board, the company is upgrading its software according to SST rules.
"We chose to sit out the first round of SST certification, but we are making our software compliant with SST and will go through the testing process eventually," Krumlauf says, adding that most of CCH's clients have not expressed a need or desire to use SST procedures immediately.
CCH is also enhancing its integration with general ledger files this year. "We're trying to get less disruption of workflow," Krumlauf says. To strengthen its brand in the software market, CCH is also focusing more on the CCH name itself. Its SalesTax.com, for example, will now be known as CCH.com.
Defining Taxability Rules
Integration with ERP systems is also moving ahead at Vertex, a Berwyn, Pa.-based company that is offering a new Tax Assist feature that contains and defines rules on taxability in a new Vertex O Series Taxability Manager user interface, says John Cowan, director of the company's Oracle Solutions Practice.
"The Vertex O Series software provides College Board's silo applications a single and centralized mechanism in calculating sales tax, managing and maintaining rules, integrating with the financial back-end system, and providing end-to-end reporting," says Bahar Limaye, application architect for The College Board. "It provides a significant return on investment for The College Board by streamlining and efficiently aligning business processes with technology for our service-oriented e-commerce platform."
Cowan says using the Vertex O Series is cheaper, since the vendor maintains the code and makes changes, including when new versions of ERP systems are installed. Since the O Series provides update notifications, "Customers can run their operation on standard or 'vanilla' tax system connections, so that they do not create costly modifications."
In addition, he says, the Vertex product now enables a single transaction to drive multiple taxes independently of the standard sales tax calculation. Often, taxing authorities impose surcharges, disposal fees, excise taxes, and other miscellaneous taxes in addition to sales and use tax on the same transactions. "This feature allows our customers to accommodate these multiple impositions from tax calculation and into detailed reporting," he says.
Moreover, the Taxability Manager can now examine an unlimited number of rules to classify any single transaction as taxable, exempt, or subject to special tax treatment.
Vertex has also introduced the O Series Lease Tax application, which comes loaded with tens of thousands of state and local tax rules to handle the complex mix of decision drivers, surcharges, and end-of-lease conditions.
To keep up with SST requirements, Vertex O Series was built with a data model that can define state-sourcing rules, taxability of products and services, rate changes, and other SST-related calculations. Vertex also supports VAT and other international tax issues for 128 countries. Through its electronic filing features, its tax calculation engine summarizes tax by reporting period and imports data directly onto forms or into the e-filing format.
Enveloping EDI Filing
Like Avalara, RIA, has turned to an alliance with another vendor to increase its offerings.
Part of Thomson Tax and Accounting, Corporate Software & Services, RIA has implemented three major changes in the past year: integration with Sabrix for a complete transaction tax management application; the expansion of electric-filing capabilities, including the remittance of batch EDI remittances for multiple business units; and a new focus on specific industries.
"Sabrix allows us to compete with a front-end calculation piece, which flows into our InSource Sales & Use Tax Manager," says Mike Sanders, RIA's senior director of product development for transaction tax. InSource now supports all tax rate data down to ZIP-plus-4 levels in all 50 states and 900,000 possible taxing boundaries.
RIA's international tax capability now extends only to Canada, but this may expand through the Sabrix connection, since its partner supports VAT transactions in 150 countries, Sanders says.
The InSource application also supports e-filing for 19 states. For companies working with electronic data interchange, RIA is now offering an "enveloping" service that lets a chain of retail stores, for example, remit tax payments through one large EDI batch rather than separately for each store.
"If they have to remit one return per store, we can submit one EDI envelope," Sanders says.
Also new to the market is a planned series of industry modules. The first application in this line is designed for the food and beverage industry and supports specialized transactions, such as sales and use taxes on prepared and pre-packaged foods, restaurant soft drink sales, and candy sold via fundraisers.
Because the module is built on an open architecture, RIA can easily modify it for other vertical industries and their transaction taxes, Sanders says. In cases where RIA doesn't support a particular type of transaction, its industry-specific software will provide flexibility.
RIA also offers sales and use tax compliance through an outsourced managed service of Tax Partners, acquired by Thomson last year.
Beyond Sales and Use
With an established calculation engine for sales and use tax, Sabrix has been extending the functionality of its Sabrix Sales and Use Tax Manager to cover many of the growing number of additional taxes companies face.
"The real focus has been to really increase and broaden the capability to manage transaction taxes beyond sales and use, and make a single application suite for all types of transaction taxes and value-added taxes," says Mehrdad Talaifar, vice president of business consulting.
Among the added taxes and fees are charges for computer recycling, refuges, and insurance premiums.
Sabrix software is also designed to make it easier to figure tax applied to each product purchased as part of a bundled package. For example, an advertising agency charges a client $500,000 for promotional materials that were distributed to 1,000 different corporate locations, where the sales tax might have to be figured in thousands of different ways. The campaign work could be divided into five different charges, for paper, signs, printing, envelope stuffing, and mailing, for example, and each charge could be taxed differently in each of the 1,000 locations.
Sabrix automatically determines the tax for each product category at each location. "It allows our customer to do that without changing their business process," Talaifar continues. "They can take a single bundled charge and separate it any way they wish to do the payment of each tax. It's built into our software so they don't have to build it into their ERP or billing system."
Among improvements to its Sabrix VAT Manager software, the company has expanded its reporting capabilities and research. It also now provides the ability to create country-specific invoice messaging, which more countries are requiring to show how tax was calculated.
Sabrix supports tax rates and rules for 140 countries and offers a combined VAT and sales-and-use product, Sabrix Global Tax Manager. Pricing for its suite of sales and use tax applications starts at $48,000.
Paul Demery is a freelance writer based in Chicago.
