What is a POS system and how does it collect sales tax?

In the context of retail, a point-of-sale system is any device that allows a seller to process a customer’s purchase. Like a lot of elder millennials, my experience with POS systems started with Fisher-Price and continues with self-checkout, PayPal, and Square. 

Despite decades of near-daily experience with these ubiquitous systems, there was a lot I didn’t know about the technology, especially when it comes to managing the money collected at the point of sale.

Luckily, it’s part of my job to delve into a range of financial topics. After doing some digging, I’d like to share the following:

• The history of POS systems
• What POS systems look like today
• How POS systems account for sales tax
• Integrating POS systems with sales tax automation

Like a lot of computer-based technology, I assumed POS systems got their start at some point in the 1960s or 1970s when computers started popping up more regularly in business settings. Turns out, I was thinking almost 100 years too modern.

The mechanical cash register is really the OG POS, and it was invented in the late 1800s by James Ritty to help track sales at his saloon. Over the years, upgrades like cash drawers, electric motors, receipt printers, and computer processors were added to these devices, creating more sophisticated accounting machines.

Electronic POS systems began to roll out in the 1970s (partial credit for me!), with touch screen capabilities introduced the following decade. As the systems got smarter, the features became more robust, allowing retailers to collect and assess transaction data — including sales tax calculation.

Few retailers or restaurants today rely solely on the simple cash register. Most modern POS systems are networked and include inventory management, accounting, and reporting capabilities. User interfaces have gotten more advanced as well, especially with the inclusion of both barcode scanning and touch screen technology.

While the cash drawer part of the cash register was one of the first additions, integrating electronic card readers was perhaps one of the most favored among anyone who had to use credit card imprinters (chu-chunk!).  

Other advancements in POS technology include:

• Self-checkout or ordering kiosks
• Tablets on swivels replacing larger, more cumbersome hardware
• Ecommerce POS integration
• Handheld devices and mobile apps

As POS systems grew more sophisticated, features like barcode scanning and inventory management have been a boon to brick-and-mortar retailers. By offering the option of both processing sales faster and tracking what they sell as they sell it, keeping appropriate stock on hand got a lot easier.

Similarly, incorporating sales tax information also simplifies the sales process for retailers. Though many assume brick-and-mortar stores only have to worry about the tax rate of the jurisdiction at their physical location, it can often be more complex. For example:

• Different items may have different tax rates. A store selling sport sneakers and fashion shoes may have to apply reduced rates to certain styles. Or grocery stores may have multiple rates for prepared foods, groceries, soda, and candy.
• Exemptions can throw a wrench in the gears. Whether the item is exempt, the buyer is exempt, or an item is being purchased for resale, a POS system must be able to account for nontaxable sales. For stores in areas with tax-exempt holidays, tracking which items qualify for temporary exemptions can be a compliance headache in and of itself.
• Multiple locations, multiple tax rates. Even if you’re opening another location just across town, tax jurisdiction borders are complicated, sometimes bisecting counties, cities, or even streets. Ensuring your POS system applies the correct sales tax rate in each location is imperative to ensuring compliance.

By integrating sales tax software with POS systems, information like item taxability, jurisdiction rates, and special exemptions can be applied without added effort from the cashier. With more robust systems, rates can be assessed based on the location of the sale, with tax information aggregated across multiple sales channels, whether online, in-store, or from the field.

Perhaps one of the biggest benefits of automating sales tax within a POS system is the peace of mind it can provide. Maintaining compliance is greatly simplified when regularly updated rates are automatically pushed to your checkout system via the cloud.

Even more convenient is the ability to automatically set aside sales tax for each sale. DAVO by Avalara earmarks collected tax based on daily sales. The tax is secured in a holding account so it doesn’t get deposited with your business’s funds. At the end of the reporting period, DAVO can help you file your returns and remit tax to the jurisdiction with the money on-hand in your holding account.

The right POS system is a key point of success whether you have a brick-and-mortar business, an ecommerce store, or both. Avalara has solutions for restaurants and retail and ecommerce businesses that help incorporate sales tax compliance with your POS system as well as inventory management, billing, and accounting systems.

By automating tax compliance, you let technology shoulder the burden of calculating, collecting, and remitting tax on your behalf. If you think Avalara might be right for your business, schedule a call with one of our experts today.