When is it Time to Automate Sales Tax?
The biggest barrier to companies automating sales tax is often inertia. Without a shake-up of the status quo, the de facto response is “why change?” or “I’ll get to it later.” It typically takes something significant to get people to pull the trigger on sales tax automation.
Here are 10 common “events” that could signal it’s time to make a change when it comes to how you manage your sales tax.
More resources, more market share, more customers, more revenue…. More is good, right? Yes. But growing a business can also mean more obligations to collect and remit sales tax. Expanding into new states, either physically or operationally (wider distribution, ecommerce sales or geographically dispersed customers) can quickly create additional tax complexity and compliance burdens. If international markets are on your growth plan, then you’re also looking at value-added tax (VAT) and landed costs and the management of those taxes on top of U.S. sales and use tax.
When a funding event happens — be it private or institutional, an IPO, or even an exit strategy — investors will be laser-focused on your business, finances and compliance practices. Most companies don’t realize that how you manage tax, including sales tax, can impact valuation. Discovery of unfavorable audit outcomes or mismanaged sales and use tax can kill a deal. You may also be subject to new tax rules depending on how you plan to use that funding. Hiring, product development, expansion — all of these growth activities can change or add to your sales and use tax compliance requirements. Be sure you’re doing everything right now so you avoid surprises later.
Acquisition and Mergers
The strategic decision to acquire or merge with another company may be obvious, but the process is typically less elegant. The meshing together of people, assets, systems and processes is often lengthy and complicated. Who has time for the minutia of sales tax? Not finance and IT; they’re focused elsewhere. Yet, many of the motivators for acquiring a business — more market share, a broader product mix, even physical property — are common tax liability triggers. No matter how inconsequential tax compliance may seem during a merger, it should not be overlooked.
A new CFO or controller will likely want to dive deep into how you currently handle compliance and may even have some good ideas on how to better operationalize and optimize the business. This could mean re-evaluating your financial systems and filling any gaps by onboarding new solutions, like sales tax automation, that can advance these objectives.
New products or services
For most sellers, adding another item or brand to the mix isn’t a big deal. But taxability can become an issue for businesses making more wide-sweeping changes. For example, a software company that decides to sell digital downloads in addition to CDs, a furniture company that adds installation and delivery services, or a cosmetics and beauty supply company that branches out to include a line of nutritional supplements and health drinks — all of these new products or services can have vastly different taxability rules and rates from state to state.
New sales channels.
Deciding to sell through more or different channels can also add to your sales tax burden. For example, manufacturers or suppliers who sell direct to consumers, or traditional retailers who branch out into ecommerce, may quickly find that they now have multi-state nexus (an obligation to register and collect sales tax in states) based on these new channel sales activities. Subscription-based, SaaS delivery, and multi-level selling models also come with their own sales tax headaches. Any news sales strategy carries some risks. Sales tax shouldn’t be one of them.
Technology Platform Changes
As your business grows, your technology platform and functionality needs will evolve as well. Software and SaaS solutions that integrate with ERP, ecommerce systems and accounting systems can add value without being cost prohibitive. Talk to your providers about available add-ons, like Avalara AvaTax tax compliance software, which can help you scale operations and grow more efficiently.
It’s never fun to cut back, but doing more with less is a legitimate strategy. In the past, this often meant overburdening staff with extra work or outsourcing taxes and other burdensome activities to bookkeepers or accountants. Today, reliable, affordable SaaS providers, like Avalara, can automate these processes for you. Avalara AvaTax handles all areas of tax compliance (calculation, filing, reporting) and scales to the needs of your business now, when things are tight, and later, when you’re ready to grow again.
While a sales tax audit is never definite, there’s also no guarantee that you won’t be audited. If you haven’t been through one, it’s hard to know what to expect or how much time it will take to prove you’re doing sales tax right (or that you aren’t). Either way, audits are costly. Wakefield estimates that the average audit costs a company $114,000. If you have been through an audit and it didn’t go well, you’ll likely stay on state auditors radars and will be subject to repeated scrutiny. As they say, the best defense is a good offense. Not only do AvaTax customers pass audits without penalty 50% more often than companies that don’t automate sales tax, but Avalara even offers a 100% audit accuracy guarantee.
Many states are making wide-sweeping changes in how they tax products and services as a means to generate more sales tax revenue. For example, last year 11 states considered changing their tax laws to start taxing services in addition to goods — something that 18 other states already do. And this year, 17 states are considering changing their nexus laws or introducing new economic nexus thresholds. Often, these changes are done last minute or with minimal notice, so it’s not always easy to know when they happen or how they affect you. Even something as seemingly innocuous as a sales tax holiday can be significant if you’re not prepared.
It’s highly likely that your company will undergo one or more of these “trigger events” in the near future. So why wait? Avalara AvaTax software integrates into your billing systems now so that when the inevitable happens, you’re already ahead of the game.
For a more personal view of how these events impacted leading companies and why they decided to change how they manage tax compliance, download Competitive Advantages of Sales Tax Automation, a look at how industry leaders use tax automation technology to optimize their business.