Sales Tax Technology 101

Chapter 1: The Basics

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 start at the beginning: what sales tax technology is and how it helps businesses like yours.

What is sales tax technology?

As companies move toward the productivity and responsiveness of digital transformation, they discover cloud-based sales tax technology can automate end-to-end sales tax processes for greater efficiency and improved accuracy.  

These types of programs handle business registration, apply current tax rates for tens of thousands of jurisdictions (over 12,000 in the United States alone), simplify document management, and file returns. And because they integrate with existing ERP, accounting, and business systems, they can be installed with minimal resource allocation or downtime.

The implementation of sales tax technology can be compared to the transformation that occurred not too long ago with payroll. Once upon a time, employee hours were computed and paychecks were distributed manually. But automation dramatically simplified the process, and most companies wouldn’t dream of implementing manual payroll systems. Considering the complexity and legal liabilities of assessing and remitting sales tax for multiple tax authorities, the benefits of automating sales tax can be even more impactful.

Do all businesses need sales tax technology?

Businesses selling a handful of products in one location may be able to keep up with a manual system. It’s a time-consuming process with an increased chance of error, but many small businesses get by without automation, especially those that don’t sell online.

But for anything more complex, automation can save significant time and resources. Rather than continually updating tax rates, monitoring local tax law changes, sifting through questionably stored exemption certificates, and remitting to multiple jurisdictions with different deadlines, sales tax technology automates each step according to the latest information and policies. Selling in multiple tax jurisdictions, expanding product lines, conducting business across borders or in Colorado, or having multiple exempt customers all increase the burden of sales tax management exponentially. Businesses meeting any of these descriptions should evaluate the ROI of an automated system.

Selling in multiple tax jurisdictions, expanding product lines, conducting business across borders or in Colorado, or having multiple exempt customers all increase the burden of sales tax management exponentially.

It’s important to keep in mind that all industries can be subject to sales tax obligations. Manufacturing, nonprofit, agriculture, software, telecom — businesses in each are responsible for ensuring compliance. And not owing sales tax isn’t necessarily a get-out-of-filing-free card; it’s often just as time-consuming and labor intensive to prove tax isn’t owed as it is to file and remit a standard sales tax return.

Sales tax compliance comparison: manual vs. automated

  MANUAL AUTOMATED
REGISTRATION

Determine individual jurisdictions in which there is a sales tax obligation (also called nexus).

Register with individual tax authorities.

Remit registration fees, where applicable.

Monitor sales according to nexus thresholds and register with additional authorities, as needed.

Reregister when select registrations expire.

Monitor legislative changes in each jurisdiction for changes in nexus thresholds.

Determine individual jurisdictions in which there is a sales tax obligation (also called nexus).

Provide the information for a licensing program (once).

Remit fees or make changes when alerted by the software

TAX RATES

Download tax rate tables.

Monitor changes in sales tax laws and rates to ensure accuracy.

Assign tax rates and applicability for each sale in each jurisdiction.

Apply tax exemptions when presented with a valid certificate.

Maintain certificate records.

Monitor certificate expirations and request updated documents as needed.

Track sales tax holidays, when applicable.

In the software, select states in which you have nexus.

Upload exemption certificates.

FILING AND REMITTING

Determine the filing schedule and deadlines for each tax authority.

Complete sales tax return forms.

File via paper, phone, or electronically, based on the  method each authority allows.

Remit payments to each authority, based on their remittance requirements.

Generate signature-ready returns when alerted.

Submit paper returns or initiate electronic returns, based on authority requirements.

Remit payment to a returns provider for distribution as needed.

AUDITS

Maintain accurate exemption records.

Produce documents as requested by auditors.

Direct auditors to customized dashboards for document retrieval.

Sales tax automation: benefits at a glance

Reduce risk

Even the best humans get tired, overwhelmed, or distracted. Human error can lead to costly penalties and fees; implementing an automation solution greatly increases the accuracy of your sales tax compliance process.

Increase efficiency

When you have software managing your sales tax, your financial team is free to focus on the initiatives that drive the growth of your business.

Speed up the process

Because calculations are done via algorithms in the cloud, a process that takes several minutes or hours to complete manually is done in nanoseconds.

Charge the right rate

Sales tax software finds rates at the address level, which is far more accurate than ZIP code-based rates.

Improve customer experience

By providing the correct sales tax calculations at the point of sale, customers know exactly what they’re paying, without having to wait.

Stay compliant through change

Sales tax software helps companies adjust as laws and rules change, or during times of business growth and expansion.
What is Avalara Tax Automation?

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