Solving the five pains of sales tax filing and remittance
For sales tax management, inconsistency is the only constant
Managing sales tax compliance has never been a simple task. With the growth of sales channels, ERP solutions, and product categories, today’s regulatory and business environment features a complex array of rules, regulations and ongoing tasks requiring a Herculean effort to understand. Moreover, the cost to hire dedicated help can be a challenge for startups or businesses in highly competitive industries.
As an example of this complexity, consider the following rules that vary by state.
- Alabama — The DOR will receive and disburse the sales taxes for over 200 different cities and counties in Alabama However, they do not collect for all counties and cities. It is the responsibility of each business to collect and file with those individual municipalities for which the state does not administer.
- Arizona — Remittance deadline dates vary based on paper filing vs. electronic.
- Washington — The sales tax filing due date has been changed from the 25th to the 30th and back to the 25th over the past several years.
- New York — Sales tax prepayments are not due with the return, but “three business days after the 22nd of the month.”
The top five sales tax management challenges
We work with businesses of all sizes to solve complex tax compliance challenges every day. Many of these growing businesses are relying on in-house resources to get the job done and, as a result, are encountering challenges. The most common complaints we hear about are as follows:
1. Filing local sales tax returns
Each state has its own set of rules and regulations that may differ from other states. In addition to state rules, cities and counties may impose and manage sales and use tax returns on their own. Responsibility lies with the business to not only determine if they have to file with specific cities and counties, but also to register of their own accord.
2. Sales tax due dates and filing schedules
Not all returns are due on the same day of the month. When dealing with multiple states and local jurisdictions, the number of due dates and filing schedules that must be managed can be daunting. These tasks are time consuming and prevent employees from engaging in more value-added efforts to build the business.
In an effort to increase income and cash flow, a number of jurisdictions are adding prepayment requirements for larger tax amounts. Prepayment requires payments to be made to jurisdictions on a different filing schedule, sometimes more than once a month. Due dates are also dynamic when adjusting for state furlough days, state and federal holidays and weekends. If jurisdictions cross time zones, payment deadlines vary depending on time zone.
3. Differing sales tax payment methods
Each state determines what payment options are available to businesses. Most states now allow returns to be paid electronically, either through electronic check or the Automated Clearing House (ACH) process. Some states may have infrastructure and software limitations. For example, some states or municipalities do not have the capability to receive ACH payments.
Timing of automated withdrawals also creates a concern. Many businesses run a risk that the state will withdraw funds in error on the wrong schedule or that their banks will not be able to deliver the check or electronic transfer at the right time. Not all banks have the ability to initiate ACH-credit payments where a business pushes the funds to states, limiting their payment options.
4. Differing sales tax filing methods
Not all sales tax returns processes are created equal. Filing methods can vary as much as payment methods. Methods allowed by states and individual municipalities can vary within the same state. Some states now require sales tax returns to be filed electronically; others still require hard-copy submission and a few states offer online filing along with an electronic data interchange (EDI) option.
In addition to methods of filing, forms can also vary from jurisdiction to jurisdiction. Keeping track of the rapidly changing environment of sales tax compliance can be confusing and time consuming. In order to keep up with how returns should be filed for all states, a business needs, at a minimum, a full-time tax specialist to track, implement and document all the changes.
5. Notice management
Once your sales tax return has been filed and your liability remitted, compliance isn’t over. Although your returns are filed and paid on-time, jurisdictions may make an error and send a notice. Their systems may not have read a postmark date properly, or a payment could have been applied to an incorrect account, all causing notices to be sent.
In the 2011 publication, Streamlining Sales and Use Tax Management, the Aberdeen Group highlighted key steps companies should aspire to in order to achieve best-in-class performance in sales and use tax compliance:
- Automate tax rate updates to facilitate calculations.
- Enable centralized management of tax information
- Establish standardized procedures for managing government audits.
In-house sales tax filing challenges
A marked decrease in sales and use tax income over the past few years, compounded by overall budget shortfalls has caused states to focus on ways to reverse these trends.
To this end, states are changing laws and regulations to broaden the definition of nexus, increasing the number of audits, decreasing exemption qualifications and removing timely filing discounts, while adding prepayment requirements. As a result, businesses who already have to “do more with less,” find that keeping sales and use tax filing and remittance in-house creates challenges such as:
- Training and staff development needs — Existing staff require frequent updates and training to keep up with the latest changes in rules and regulations for each state and municipality where there is sales tax liability.
- Lack of quality processes — Audit risk is increased when manual processes are used to file and remit tax liability; oversight becomes difficult when managing numerous tax returns and filing and remittance dates; employee turnover results in lack of consistency in return preparation.
- Infrastructure investment — Manual processes relying on purchased software or databases can require significant capital investment to maintain while being time and resource intensive, with no guarantee of reliability or accuracy.
In addition to these challenges, the COVID-19 pandemic and its impact on the economy has brought about workforce instability. Today’s workforce can be fluid with high turnover rates and individual staff members managing more than one position on the job. This increases the need for costly, ongoing training and knowledge development to understand and keep up with all the rules and regulations of tax compliance.
Reducing tax compliance costs while improving performance
In a recent Aberdeen Group survey, companies became Best-in-Class by finding the best ways to reduce costs and improve performance. Methods they employed included:
- Workflow automation from tax calculation to remittance
- Centralizing management of tax information
- Establishing standardized procedures for managing government audits
The benefits of improved tax management
According to the Aberdeen survey, best-in-class companies are:
- One and half more likely to experience positive government audit results
- Half as likely to over-remit sales and use taxes to their local governments
- Nearly three times more likely to experience a decrease in government audit penalties and fines
- Nearly two times more likely to experience a decrease in time dedicated to addressing tax errors
Best-in-class companies were cited as being 50% more likely than all other companies to hire third-party firms to conduct internal and/or reverse audits; and 95% more likely than all others to outsource their tax management responsibilities to third-party firms.
Outsourcing tax compliance needs
Outsourcing is a viable, cost-effective method of enabling your company to improve audit response and results, strengthen customer relationships and reduce overhead costs of the non-revenue building activities of sales tax management.
Outsourcing enables businesses to accomplish the following:
- Employ tax, process and industry expertise and best practices — you don’t need to know it all.
- Improve quality and oversight — without the burden of the day-to-day demands of filing and remittance, you are better able to provide oversight, management and review of documentation and data.
- Gain control of difficult processes — Outsourcing gives you more control over delivering a consistent process. Creating a clear audit trail is possible when best practices are employed by the vendor you are outsourcing your sales tax compliance services to—you can gain greater oversight and visibility of the process with the right vendor.
- Reduce and share audit exposure and risk — a qualified outsource vendor should provide you with audit support in case of an audit, thorough notice management and fast turnaround of returns, payment and notice responses to reduce your risk.
- Focus on activities that add real value — No more fumbling through state websites for sales tax information and filing deadlines. No more preparing returns every month. Instead of being focused on paying sales tax liabilities for two weeks’ out of the month, you can focus on income-producing and business development activities.
- Reduce capital expenses for back room tasks — This is true for businesses using a cloud-based service to resolve their sales tax compliance challenges. A cloud (or web) based solution reduces the investment required to develop and maintain compliance activities.
- Reduce operating expenses — Less process, less waste.
Avalara Returns as a path to tax compliance
Outsourcing with Avalara Returns allows businesses to focus on their core competencies by providing a reliable, accurate and affordable service to address the necessary function of sales and use tax compliance.
No matter how dynamic the sales tax environment becomes, Avalara customers can be sure that their sales tax liabilities are being managed efficiently, effectively and accurately. Here is how using Avalara Returns solves the five pains of sales tax compliance:
- Filing Local Returns — Returns makes filing multiple returns in varied jurisdictions a breeze. Avalara Returns prepares and files the forms, along with payment, to the appropriate taxing authorities.
- Due Dates and Filing Schedules — Returns maintains the schedules of state and local jurisdictions, so you don’t have to worry about tracking due dates and filing schedules. Timely remittance of your tax liability is a burden lifted from your business, enabling added benefits such as on-time remittance discounts.
- Different Payment Methods — Returns manages your payments to each taxing authority. We ensure that disbursement of funds to each entity is made according to the current requirements defined by that jurisdiction. Avalara Returns has the capability to remit your payment using any of the available methods.
- Different Filing Methods — Returns maintains all the up-to-date sales tax filing information such as filing requirements. We pull the appropriate form available on the filing calendar for a specific jurisdiction and file in a timely fashion.
- Notice Management — Managing tax notices is an integral part of the Avalara Returns process. As an Returns customer, your notices are logged into our database and responded to promptly. Returns customers are able to view and download a real-time report of notices, showing their status and any notes on steps taken to resolve issues.