Chapter 3: Developing a Sales Tax Strategy
Sales tax is a complicated world. We’ve put together this series to give you the information you need to navigate the complexities of compliance, as well as the solutions offered through sales tax technology. In this chapter, we cover some of the groundwork needed to create an effective sales tax strategy.
Creating a successful sales tax strategy
Implementing a broad process change isn’t easy, and sales tax compliance is no exception. However, by developing a comprehensive strategy, you can implement the right processes for your business — now and in the future. Like anything that affects multiple areas of your business, creating a sales tax strategy requires solid investigation up front, with an honest assessment of the current status of your business and plans for the future.
Where do I begin?
With sales tax compliance, it all starts by evaluating risk. With so many variables and changes in the sales tax landscape, risk is an ever-evolving beast. Your strategy should start with identifying the risk you have now so you can address it properly. It’s also best to be mindful of where your long-term plans might expose you to additional liabilities, so you can build sufficient coverage into your solution.
Internal risk factors
- Entering new markets
- Launching new products or divisions
- Hiring remote employees
- Changing your production or distribution line
- Mergers and acquisitions
External risk factors
- Tax law changes
- Rate changes
- New or altered trade bloc agreements
- Exemption amendments
Before you begin to form your strategy, it may be beneficial to commission a transaction tax risk assessment or a nexus study. These evaluations can uncover areas of concern you don’t even realize you have.
Be mindful of where your long-term plans might expose you to additional liabilities, so you can build sufficient coverage into your solution.
Plan for the long term
Though mentioned before, this point deserves reiteration. After all, if you develop a process based only on your current needs, you run the risk of (a) non-compliance when you grow out of your process or (b) your process hamstringing company growth. Neither is a pleasant option.
Before you outline your strategy, take a look at where your business intends to be in five or 10 years. If you plan to release new products, sell into additional markets, or expand the footprint of your company, your sales tax strategy either has to account for this now or be adaptable enough to grow with your business.
Before you outline your strategy, take a look at where your business intends to be in five or 10 years.
Build for reliability and efficiency
Even if your business is the rare bird that isn’t growth-minded, your sales tax process should be designed to evolve. Transaction taxes change frequently, expanding the what, where, when, and how items are taxed in each jurisdiction. And jurisdictions are keenly aware of the income potential of previously untaxed goods and sellers. All this leads to an evolving landscape that shows no signs of slowing or settling down.
Your goal is to develop a strategy that improves efficiency, accuracy, and adaptability while reducing the risk and burden associated with audits. Your existing business systems can be a great starting point for how to conceptualize your new process. You’ve ostensibly put in a lot of research, trial, and error in determining the best invoicing, ERP, ecommerce, accounting, and/or CRM systems, and know which platforms perform best for your business. A sales tax strategy that complements these systems can be the easiest to adopt. Consider a solution with prebuilt connectors that integrate with the programs you’re already using. If your system was built in-house or has an especially high degree of customization, look for one with a robust API and developer support.
Incorporate the right technology
People are great, and your workforce is undoubtedly one of your company’s greatest assets. That said, the complexity and stakes of sales tax compliance make it fertile ground for automation. Even the most competent employees can make mistakes, which can lead to heavy penalties and fees.
The benefits to automation are many and include:
- Costly human errors can be significantly reduced
- Tedious tasks are handled, so your team can work on more interesting and growth-centric projects
- IT isn’t managing financial updates and downloads, so they can focus on the magic they work to keep your company running
- Calculations that take hours or days can be completed in nanoseconds
- Law and rule changes from all jurisdictions are applied appropriately
Cloud-based sales tax solutions can automate every step of the compliance process: registration, calculation, exemptions, returns and remittance, and document management. They’re often more adaptable, secure, and less expensive than maintaining a legacy system. And because updates occur as changes are enacted, automated solutions ensure a higher degree of accuracy than an on-premises system.
From strategy to solution
Once you’ve completed the requisite background work, you’ll need to shortlist your options. Determine which aspects of the process you want to automate, the companies you plan to use, and how you’ll train your staff. Big shifts are never easy, but with proper planning and the right providers, you should be able to implement a compliance process with minimal disruption to your business.