Why tax automation plays a critical role in empowering small business entrepreneurs
Small business owners must wear many hats to not only keep their operations up and running but to also grow their business. With so many things to do — marketing, sales, customer service, etc. — dealing with business requirements that provide little to no value to the bottom line may seem counterintuitive. Still, many small business merchants find themselves in the time-consuming, costly cycle of manually managing sales tax obligations.
The complex nature of tax makes it inherently challenging to manage — even for the most sophisticated businesses. Just look at the numbers:
- There are more than 13,000 sales and use tax jurisdictions in the U.S. alone.
- In 2021, there were more than 123,000 rate and taxability updates in the U.S. and Canada.
These numbers only tell part of the complicated story. Here are some of the common challenges small businesses must manage and contend with when manually managing sales tax.
Changing tax rates and rules
Tax rates and rules change constantly. Keeping up with the changes to tax laws can quickly become an impossible task, given the number of jurisdictions in the U.S.
For ecommerce sellers, tax laws for what’s known as economic nexus create additional complexity. Economic nexus laws require remote sellers to charge, collect, and remit sales tax based on where the buyer is located.
Today, 45 states, parts of Alaska, and the District of Columbia have adopted economic nexus laws. What makes these laws especially challenging for small businesses to navigate is that each state can define its own rules. For example, you can trigger economic nexus obligations in Arizona when you reach $100,000 in sales in the state. In New York, you must meet a threshold of $500,000 in sales and have 100 transactions in the state. It’s easy to see how keeping up with the various economic nexus rules along with different tax rates can be an onerous, nearly impossible task.
In addition to varying tax rates and rules, the type of product or service being sold also impacts sales tax calculations. For example, in Texas, deodorant is taxable, while antiperspirant is exempt. To get the taxability correct, businesses need to know specific product codes and how they correlate with tax codes in each state.
Hefty financial and time costs
Given the complexity outlined above, it’s probably easy to imagine the cost associated with getting sales tax right.
According to a 2021 survey, small businesses spend 131 hours and nearly $12,000 per month manually managing sales and use tax compliance. When looking closely at what specific pieces of the tax compliance journey are the costliest for small businesses, the survey found that identifying state sales tax obligations and filing requirements, as well as tax rates and calculations cost small businesses roughly 38 hours per month on average.
The truth is in the data: Manually managing sales tax in a digital world is impracticable.
How automation can benefit small businesses
Sales tax automation is designed for businesses operating in our digital-first world — and more and more businesses are taking advantage of this technology. In fact, the survey mentioned previously found that 25% of small businesses are more likely to adopt new technologies to manage tax.
The benefits of automation are clear:
- A foundation for growth — Tax automation provides the flexibility to comply with new tax obligations as a business grows into new areas or product sets.
- A conduit for data visibility — Tax technology integrates with existing ecommerce systems, which makes it easier to better understand where you sold a product and to whom.
- A clear audit trail — Tax technology creates an archive of your tax reporting history so your business is prepared if and when an auditor comes knocking.
By leveraging technology to automate the compliance process, small businesses can begin looking at compliance as a channel to improve processes, save money, and more efficiently serve customers.
To put the power of tax automation into the hands of small ecommerce businesses, GoDaddy and Avalara have partnered to provide Avalara AvaTax sales tax calculations as part of GoDaddy’s new Websites + Marketing Commerce Plus plan. For more information on this solution, read here.
Cover photo by Canva
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