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Sales tax and excise tax: Here’s why you need one solution for both

  • May 18, 2020 | John Beaty

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Some companies are required to collect sales and use tax. Others must instead collect and remit excise tax. But what happens when a business is liable for both?

When a purchase involves both excise tax and sales and use tax, the calculations are far from simple. In industries like oil and gas or tobacco, a single transaction can cause a tangle of complications as software systems work to sort out numerous rules, rates, and requirements. There is significant room for error, which can lead to miscalculations, inaccurate reporting, audit risk, fines, and penalties.

While many businesses have managed to tackle these complications by building workarounds and creating customizations, the complexity of bringing together multiple tax types across more than one tax engine can quickly become unmanageable.

However, businesses can efficiently manage these processes and systems while still meeting the requirements of today’s complex and ever-evolving dual taxation landscape. A single, SaaS-based software solution for both excise tax and sales and use tax can help ensure highly accurate and timely rates and rules, easier access to reporting and other requirements, and lower maintenance burden.

Are you wondering if a similar combined solution would be a wise investment for your company? To help, let’s take a look at several key areas where a single-solution vendor can make a significant difference.

Sales tax vs. excise tax calculations

Before we dive into the biggest benefits of a single solution, it helps to consider the fundamental differences in how these two types of tax are calculated.

First, there’s sales and use tax, which is relatively straightforward. Because these rates are based on the dollar amount of a transaction, all your system has to do is calculate a percentage.

But in many industries — oil and gas, fuel, tobacco, lubricants, renewable fuels, and sometimes even alcohol — excise tax comes into play. And for those calculations, determinations are based on how much volume is sold.

Depending on the industry and type of product, these calculations can be highly complex. For example, consider a standard sale of fuel. In this example, a gallon of fuel is rarely just a gallon. To accurately calculate taxes, you’d also have to factor in various parameters such as:

  • What percentage of the product is ethanol?
  • What’s the origin and destination of the product?
  • Where did the title transfer occur?
  • Where did the actual transaction occur?
  • Did it occur above the rack, at the rack, or below the rack?

The answers to these questions can have a big impact on how that gallon of fuel will be taxed. With this in mind, it’s easy to see where issues can arise. Tax solutions accustomed to calculating sales tax based on percentages must also be prepared to determine excise taxes based on volume — and vice versa.

Without a way to accurately calculate both types of tax, these and other determinations can become rife with risk and put your company in danger of costly audits.

The benefits of a single SaaS-based solution

Historically, affected companies have looked for straightforward calculation capabilities when choosing sales and use tax software. But as increasingly complex excise tax considerations need to be considered, being able to streamline determinations for both types of tax is becoming more and more important.

Specifically, using a single, automated solution to handle both types of taxes provides companies with:

1. Data continuity

Having all of your transactional data in one central location can greatly reduce the effort required to run reports and research data. Rather than spending hours switching back and forth between software, you can access everything in one solution.

This data continuity promotes data integrity: With one master data set to support transactional tax determinations, you won’t have to worry about the same vendor being represented differently in one system versus another. This is especially critical when it’s time to pull information for compliance checks and external reporting.

2. Reporting efficiency

A side effect of data continuity? More reliable reporting. The more reliable your data is, the better prepared you’ll be for fast and accurate reporting. With a consolidated transactional system, there’s just one data set to consult when pulling together information and researching tax issues.

This can be particularly beneficial in the event of an audit. Rather than having to work with multiple systems, full audit support can be found quickly and easily.

3. Locational accuracy

If your current solution relies on ZIP codes to determine tax rates based on location, you’re far from alone. Most sales and use tax software does. But in today's environment, where there are often multiple tax rates within the same single ZIP code, this method can drastically increase the risk of a wrong rate.

Two addresses located across the street from one another could easily be in two completely different tax jurisdictions with two separate sets of rules around sales tax and excise tax. In these instances, a geospatial solution will be needed to pinpoint the exact address for accuracy.

4. Increased ROI

Most standard solutions, such as ERPs, simply aren’t capable of addressing the unique requirements associated with excise tax. As a result, many companies have spent countless hours creating workarounds or niche products.

However, these only work so well, for so long. With constant changes to rules and rates across thousands of tax jurisdictions, they require constant maintenance to make sure the two different systems can work in tandem with one another.

In contrast, an all-in-one SaaS solution that combines sales and use tax and excise tax in one platform will be ready to handle the latest changes with ease. There are no servers to maintain, no IT updates to make, and no new processes to learn. The system is regularly revised to reflect the latest rates, ensuring each tax determination is as thorough and accurate as possible.

 

Using a single, SaaS-based solution to handle both excise tax and sales and use tax isn’t just important for compliance. It’s a sound business move, too. From greater ROI and better data to easy reporting and increased accuracy, there are many reasons companies are increasingly turning to these solutions.

To learn more about Avalara’s products, including our combined excise and sales and use tax solutions, visit AvaTax Excise. You can also schedule time to talk to our team at your convenience.


Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
John Beaty
Avalara Author
John Beaty
John Beaty
Avalara Author John Beaty
John Beaty serves as General Manager for Excise at Avalara. His extensive experience in process technology consulting in the petroleum industry, including adaptation of global ERP solutions and energy trading and risk management systems, has taken him across the United States and overseas to Asia, Europe, the Middle East, and South America.