Entrepreneurs, don't overlook sales tax when starting your business
- May 18, 2017 | John Hoyt
Few businesses are created with sales tax in mind. Experienced entrepreneurs perhaps consider it, but for most first-timers, very little planning or preparing for sales taxes is present at the beginning.
This changes over time, of course, as do the strategies employed to "handle" sales tax responsibilities. These range from the simple to the sophisticated, and they vary in effectiveness.
In rough order (and with no recommendations or endorsements), these strategies are:
- CME - also known as Close My Eyes. This is a very short-lived strategy, with painful and sometimes fatal consequences. To be avoided at all costs.
- WID - When in Doubt, charge everyone, and charge the max rate. Calculating sales taxes accurately is challenging, to put it mildly. By overcharging, you ensure compliance with the state and other authorities — but customer service will inevitably suffer because customers will eventually notice the overages.
Adopting a more sophisticated ERP system, like Microsoft Dynamics NAV or Dynamics GP, can help with both sales tax calculations and reporting. However, many companies still take a few shortcuts when dealing with sales tax by employing the following practices:
- WID - That's right. This approach can also be applied at this stage, and with the same advantages and disadvantages. It is unethical and quite possibly illegal, but it is simple and eliminates undercharging. Not recommended here either.
- STT - Sales Tax Table, and please notice the singular table. Most ERP systems offer a means of building and maintaining a "Sales Tax Table" that contains the necessary tax rates and agencies, bundled together into a tax group; the total rate is then applied to the appropriate transactions. Far more accurate than WID, it is also fairly automated once properly implemented. Sadly, tax rates, authorities, and exclusions change far too frequently for most companies to properly maintain their Sales Tax Tables, and over time, they tend to slip backwards in the direction of WID. SSTs are better than WID, to be sure, but still aren’t ideal.
Bottom line: an ERP system needs to know all the details about sales taxes and their related transactions, but ERP might not be the best system to calculate the sales taxes themselves.
What is actually needed is the ability to have any and all relevant transactions, and their related sales taxes, calculated in real-time while leveraging the services of a dedicated tax engine. This is precisely what Avalara offers.
Avalara delivers automated, cloud-based solutions that help customers manage transaction taxes, like sales tax. Avalara's pre-built connectors allow customers to get accurate tax data directly in their ERP or financial application.
Working with the ERP system as an integrated whole, Avalara can deliver the desired elements of the needed sales tax solution: real-time, accurate and simple to use.