How to increase efficiency and reduce costs through sales tax automation
The robots are taking over! AI-generated images and writing samples are all over the internet. Certain robot workers are getting more advanced (and perhaps more unsettling). Self-driving car technology continues to improve.
While discussions about automation and computer advancement often turn to Skynet, The Matrix, and BioShock, reality is far from the doom and gloom of a robotic apocalypse. (How many of us have found our Roombas hopelessly lost in the hallway or given up on getting useful information from either Alexa or Siri?)
When it comes down to it, automation is typically best suited for supplementing human effort by taking over tedious, detailed, or menial tasks. One great example: sales tax compliance.
Manual processes for sales tax compliance can be deceptively expensive. While you may not be cutting a check per se, the time involved is costing you not only the labor hours of your employees, but the opportunity cost of pulling them away from revenue generation or growth enablement tasks.
Toward the end of 2023, Avalara and Potentiate conducted a survey of businesses with fewer than 500 employees. These businesses reported spending an average of 147 hours and more than $14,000 per month on sales tax compliance.
We’ll break down the costs for businesses with 19–499 employees throughout this post. Read on to understand how automation can help you improve efficiency and reduce costs as you:
- Identify tax obligations
- Calculate sales tax rates
- Manage exemption certificates
- Prepare and file returns
- Reconcile consumer use tax
Identify tax obligations
Estimated cost: $1,740 and 15.6 hours per month identifying state sales tax obligations and filing requirements
When selling to multiple states, you have to understand where you’re required to collect and remit sales tax. Each state has its own rules around sales activities and whether exempt sales count toward thresholds. The rules are based on state and local legislation and do change from time to time.
Once you trigger an obligation, you must register to collect sales tax. Naturally, each state has its own registration process and portal.
Keeping track of compliance requirements can be time-consuming for accounting staff. Which is where automation comes in. Capabilities vary, but you can use a platform like Avalara to help you:
- Determine where you have state sales tax obligations.
- Automatically track obligations across the U.S. based on sales data.
- Get alerts when you’re approaching thresholds in new states.
- Register in multiple states with a single form.
Calculate sales tax rates
Estimated cost: $3,493 and 32.3 hours per month determining rates and collecting tax
Because sales tax is managed at state and local levels, rates vary by jurisdiction. These rates can and do change (often).
Many people who manually calculate tax rates tend to rely on tax rate tables. These tables are usually based on ZIP codes, but tax jurisdictions and ZIP codes don’t usually line up. Between that and the fact they list zone averages that can become outdated faster than they’re updated, the accuracy of rate tables can be problematic.
Another issue is item taxability. States create rules about whether items are taxable or exempt. Take food for example:
- Alabama, Mississippi, and South Dakota tax groceries at the regular sales tax rate (for now).
- Six states, including Missouri and Virginia, charge a reduced tax rate on groceries.
- The majority of states, including California and Nevada, exempt groceries, for the most part.
- Each state also defines groceries differently, with varying tax rules based on flour or sugar content, carbonation, or whether the food is prepared.
Other tax considerations may be in effect for farming equipment, jet fuel, medical devices, software, and other goods or services.
Understanding which rate to apply where and for which customers can create a never-ending need for research and validation. Automation is ideal for managing calculation compliance, such as:
- Applying rates for 13,000+ U.S. sales tax jurisdictions at the point of sale
- Updating rates in your system
- Accounting for sales tax holidays, exemptions, and partial exemptions
- Calculating precise rates, based on the address of the sale
- Reducing the risk of human error
Manage exemption certificates
Estimated cost: $3,409 and 31.3 hours per month on certificate management
A large part of tax compliance is managing exemption certificates you’ve collected in lieu of sales tax. These documents are extremely valuable — but often overlooked.
It isn’t enough to just collect a certificate from exempt buyers at the point of sale. You need to ensure the document is the correct form, applicable to the sale, and valid at the time of purchase. Again, each state has its own requirements.
Once you have the certificate, you’ll have to store it properly, so it’s accessible when needed. That can mean pulling up the form for the buyer’s subsequent purchases or providing the certificate in the event of an audit.
Losing certificates can create a tax liability on all of a customer’s tax-free purchases. Auditors can use a specific time frame to represent the evaluation window. If you have missing forms in that time frame, the amount owed is extrapolated across the full audit period to generate your total tax bill.
Properly collecting and storing exemption certificates is a vital part of the compliance process. Depending on how many people in your business work with customers, and how often those customers make tax-exempt purchases, certificate management can get complicated. Automating document compliance can help you:
- Collect digital certificates from customers as part of the purchase process.
- Securely store all records online, with on-demand access.
- Apply exemptions to future sales, automatically.
- Get alerts for expiring certificates.
- Pull detailed and summary reports for greater visibility and control.
Prepare and file returns
Estimated cost: $4,894 and 45.7 hours per month preparing and filing tax returns
One thing that’s fairly consistent across tax jurisdictions is the requirement to file. For the most part, if you’re registered in a state, you have to file regular returns, regardless of whether you actually collect any taxes during the tax period.
You’ll need to aggregate sales data across all sales and invoicing platforms, prepare each return, and submit them according to each state’s filing protocol.
Filing frequency is determined by the state. If you’re required to submit returns for a few states each year, the process can be merely tedious. But if you have to file in several states every quarter, that tedium may feel downright impossible.
By automating the returns process, you can more easily:
- Export tax data to autopopulate forms.
- Print signature-ready forms to mail in or submit electronically.
- Offload the filing process to a team of experts.
- Remit taxes to multiple tax authorities with a single payment.
Reconcile consumer use tax
Estimated cost: $4,136 and 37.8 hours per month on consumer use tax
Consumer use tax is kind of like sales tax’s sneaky sibling. While sales tax is pretty widely understood and expected, use tax likes to hide between the lines, jumping out and surprising businesses when they least expect it.
Unlike sales tax, use tax can be assessed based on how products are used, after the point of sale. For instance, if items are purchased in one jurisdiction but used in another. Or if something is purchased for resale but used for promotional or daily business needs.
Use tax is also notoriously difficult to self-assess. There are many factors contributing to use tax liability, and many businesses end up using their best guess as to the amount they owe. As most tax pros will tell you, guessing is never an ideal approach.
With an automated use tax solution, you can more accurately:
- Verify rates according to jurisdiction and tax rules.
- Determine tax obligations using built-in rates and user-defined rules.
- Correct overbilled tax on purchases to keep from overpaying.
- Maintain a clean audit trail of your self-assessment decisions.
- Aggregate data to run liability and expense analysis.
Choosing sales tax automation for your business
Most businesses can benefit from some level of sales tax automation. Whether that means just document management, only calculation and returns, or end-to-end compliance depends on the details of your business.
Avalara’s sales tax compliance platform can help you rightsize the level of automation you need. Most of our products work as stand-alone programs, but are designed to integrate with each other for smooth, reliable performance.
Sales tax automation can also help you get more out of your technology investments. Avalara integrates with common business applications, including ERPs, invoicing programs, marketplace platforms, inventory management systems, and more. Our API allows for customization or integration with additional systems.
Offloading compliance can help you support your likely very busy accounting staff. When you turn nonstrategic tasks over to machine tax wizards, your people are freed up to apply their expertise to revenue and growth initiatives. It’s one way you can use automation to supplement your people resources, helping you scale smarter.