Lessons from tobacco and vape businesses leading in compliance

There’s no blowing smoke about tobacco and vape excise tax audits — they’re a drag. Fifty-five percent of tobacco and vape businesses included in a recent Aberdeen Strategy & Research study were burned by penalties or interest from audits in the year prior to the research.

On the flip side, researchers found commonalities among companies that were the top performers in excise tax compliance management. These high achievers (described in the study as best in class) reported greater operating margins, incurred fewer audit costs, were more agile, and were better positioned to scale.

We can learn a lot from how best-in-class companies earn their honors. Fortunately, the study provides us with a cheat sheet. The outstanding grades go to tobacco and vape businesses that are more likely to automate compliance with a single-source SaaS tax management solution.

Tobacco and vape companies are under compliance pressure

Before diving into how best-in-class companies are benefiting from automation, it can help to understand why they’re turning to technology in the first place. Let’s school ourselves on the top challenges that tobacco and vape businesses face today.

According to the study, one-third of tobacco and vape businesses struggle with detailed information for calculation and reporting, while 35% of tobacco companies find it hard to maintain accurate tax liability calculations. “The higher-than-standard liability for excise taxes puts more pressure on tax professionals to ensure the accuracy of their excise tax calculations, but with a varied product mix and changing compliance regulations, it’s hard to keep up,” said Aberdeen researchers.

Vape businesses are burdened by the rapidly changing tax landscape. Forty-two percent reported they have a tough time staying up to date on rate and rule changes. They also find it difficult to keep up with changing reporting and filing regulations and to manage forms for thousands of jurisdictions.

One reason many tobacco and vape businesses struggle with compliance is they don’t have tax professionals with specific tax filing knowledge. Thirty-five percent of businesses cited lack of excise tax expertise as one of their top challenges. Researchers attributed errors resulting in audit costs to the knowledge deficit and to manual, spreadsheet-based processes.

Automation pushing the best ahead of the rest

Their need for accuracy and a means to alleviate the burden on their tax teams is driving tobacco and vape businesses to invest in excise tax compliance solutions. And those investments are paying off.

Best-in-class companies achieved a 36% increase in operating margins over two years, while others saw a decrease.
While others were hit with an increase in audit costs, these top performers saw a 34% decrease.
While others reported an increase in the amount of time spent on tax compliance, best-in-class companies attained a 33% decrease.

Tobacco and vape businesses using a combined platform for excise tax calculations and returns achieved greater improvements than companies not using a single-source solution. Researchers placed these companies above the rest and said they’re better equipped to expand into new markets, develop new products, and gain an edge on the competition.

Join the A-list

In today’s unpredictable regulatory climate, tobacco and vape companies need to do all they can to stay ahead. So sharpen your pencil and talk to our excise tax compliance experts about how Avalara tobacco and vape automation solutions can help your company become a compliance valedictorian.

Read more about how best-in-class businesses are managing compliance in The state of tobacco and vape tax compliance.

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.