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

• Sales tax and excise tax are different types of indirect tax, with different calculation methods, reporting requirements, and compliance risks.
• One key difference between sales tax and excise tax is that sales tax is generally calculated as a percentage of a transaction value, while excise tax is often based on volume or quantity.  
• Businesses operating in industries such as fuel, tobacco, and alcohol may need to manage both sales tax and excise tax on the same transaction.
• Using a single tax compliance solution can improve reporting accuracy, reduce audit risk, and simplify sales and excise tax management.

When a purchase involves both sales and use tax and excise 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 out numerous rules, rates, and requirements. There’s plenty of 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 work-arounds 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 the requirements of a dual taxation landscape with a single solution for both sales and use tax and excise tax. This can help to ensure accurate rates and rules, improved reporting, and a lower maintenance burden.

If you’re wondering if a combined solution for both taxes would be a wise investment, read on.

Before we dive into the biggest benefits of a single tax compliance solution, it helps to consider the fundamental difference between how sales tax and excise tax are calculated.

Sales tax rates are based on the dollar amount of a transaction, so your system must calculate a percentage. Calculating sales tax s not simple in practice because rates and rules vary by jurisdiction, but an automated sales tax compliance solution streamlines it.

Excise tax is more complex because it’s based on how much volume is sold. And excise tax comes into play in many industries — oil and gas, fuel, tobacco, lubricants, renewable fuels, and sometimes even alcohol.

Depending on the industry and type of product, tax calculations can be highly complex. In a standard sale of fuel, for example, a gallon of fuel is rarely just a gallon. To accurately calculate the sales and excise 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?
• What’s the location of the actual transaction?
• Did the transaction 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. Sales tax compliance solutions accustomed to calculating sales tax based on percentages must also be able to determine excise taxes based on volume — and vice versa.

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

Historically, affected companies have looked for straightforward calculation capabilities when choosing sales and use tax software. But managing excise tax has become increasingly complex. It’s essential to streamline determinations for sales and excise tax.

Using a single, automated solution to handle both sales tax and excise tax provides companies with the following.

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. Continuity is especially critical when it’s time to pull information for sales and excise tax compliance checks and external reporting.

2. Reporting efficiency

A side effect of data continuity is 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 efficiency 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 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 work-arounds 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 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 solution to handle both excise tax and sales and use tax isn’t just important for sales and excise tax compliance. It’s also a sound business move. From greater ROI and better data to easy reporting and increased accuracy, there are many reasons companies are increasingly turning to these solutions.

Speak with Avalara today about overcoming your compliance challenges.