The recovery of the US economy has seen a number of attempts to enact comprehensive tax reform at local and state level, with states such as Ohio and Louisiana replacing income taxes - levied at both businesses and individuals - with sales taxes. Outside of property and income tax, sales tax is the largest source of state tax revenue. Indeed, sales tax is responsible for providing between one-third and one-half of revenues for the 45 states that have it. Only New Hampshire, Delaware, Montana, Alaska, and Oregon do not.
In order to optimize such a substantial revenue stream, states are increasingly looking to audit firms to recover any potential income that they may have missed. The discovery of any malfeasances during an audit can have hugely negative consequences for companies - particularly SMEs, for whom the penalties and fines can practically wipe out any profits. As such, companies are having to spend time and money ensuring that they remain in compliance with the rules.
Furthermore, it is not simply a case of entering a zip code to find out how much sales tax you should be paying. Individual counties and municipalities can levy sales tax alongside the state sales tax. There are approximately 12,000 jurisdictions within the U.S. and in excess of 100,000 rules changes in total per year. Keeping up with such a vast number of changes is outside the capabilities of the majority of companies, particularly firms looking to expand across state lines.
Sales Tax automation is one of the primary tools being utilized by firms struggling to cope with the complexity of sales tax. Sales tax automation is a software solution that takes control of managing the sales tax compliance process, rather than it being done manually.
There are a number of advantages to automation, the clearest of which is a reduction in the number of errors. Dealing with sales tax manually adds in a further level of complexity that can lead to mistakes. Under Sarbanes-Oxley sales tax is one of the hardest to apply controls to, and automation makes it far more likely that firms will remain in compliance.
Automation also means a massive reduction in the amount of time taken accounting for sales tax. Tax departments are becoming increasingly lean, and they are also being asked to contribute more towards a company’s business planning than simple bookkeeping. Automation enables tax leaders to spend more time adding value and generating revenue for the firm.
Tax is a hot issue at the moment for companies, with a number of avoidance stories in the press bringing public outrage that has had huge reputational damage. Tax planning is subsequently more important than ever, and ensuring compliance is necessary. For SMEs, the costs of automation may be prohibitive in relation to the returns, particularly if their operation is restricted to one jurisdiction, as is often the case. For companies scaling up, however, it is a necessary expense that could have massive savings in the long run.