For companies that sell in multiple jurisdictions, having an automated tax transaction solution in place to manage sales and use tax functions is necessary. There are many benefits to an automated tax solution, most importantly reduced errors and increased productivity. But once the decision has been made to find and implement a solution, there are a number of important factors that need to be considered when selecting what type of solution should be used. When thinking about tax automation solutions, most people think about bolt on options – but there are many other types. We’ll discuss the different types as well as situations when each type might be the better option.
When selecting a tax automation solution, you’ll need to consider the size of company, the company’s nexus profile, the tax complexity of the items being sold, the volume of transactions, the financial system and the type of tax you’re subject to. Once you’ve determined the answers to the above items, you can then move forward with selecting the solution that’s right for you. Below, I’ll outline the five main options that are available to choose from.
1. Host Systems
Most financial systems have some level of sales tax processing capability built-in. Depending on the complexity of the taxation of your products and the jurisdictions where you do business, this built-in capability may be sufficient to meet your company’s tax automation needs.
When determining if the standard functionality is sufficient for your company’s needs, you need to evaluate the users’ proficiency in making taxability determinations, how much effort is needed to maintain the tax rules and the flexibility in the system. If you sell products that have different taxability by jurisdiction, the host system’s standard functionality is generally not sufficient to meet tax calculation requirements. Host systems typically rely heavily on the users making taxability decisions. In addition, tax rates must be maintained within the host system. Some host systems can accept a rate file to be imported into the internal rate tables.
For companies with complex taxability rules or significant business in many states, this is likely not the right solution. But for businesses selling items that are always taxable or always exempt in a limited number of states – particularly those with no local taxes, the host system tax functionality might be the right option.
2. Bolt-On Products
For companies with more complex tax processing needs, there are a number of third-party “bolt-on” products that interface with financial systems. These products are “enterprise” solutions and are installed within the company’s IT infrastructure. Vendors include Thomson Reuters, Vertex, Taxware and CCH.
For this type of solution, an interface must be established between the bolt-on package and the host financial system in order for the two systems to communicate. Some host systems have standard interfaces available to select tax packages, but the interface may not utilize all of the functionality available in the tax package. Enhancements to either the host system or interface may be required in order to achieve full functionality. A bolt-on solution is best suited for companies with more complex tax profiles and those that want to control the taxability decisions within a limited number of people – for example, within the tax department. These solutions are typically priced based on the company’s revenue – but the starting point isn’t low. So, these solutions aren’t the best for smaller companies or those without IT infrastructure to install and maintain the solution.
3. Custom Designed Systems
In companies where a custom billing system has been created, tax functionality is often built into the billing calculation. This option is often best for companies in industries with unusual tax requirements or non-standard sales tax rates such as food, medicine, telecommunications and utilities. This type of system is more difficult to maintain but can be very accurate. In some cases, a third party rate package can be incorporated into the custom calculation instead of manual rate updating. These are typically older legacy systems that have been in place for many years. Custom tax systems are not as common today given the enhanced functionality available in the bolt on systems.
4. Application Service Provider (ASP)/Cloud Hosted Systems
Another potential solution is to use an Application Service Provider (ASP) to host and maintain tax applications. Vendors offering this type of solution include Avalara, Exactor, CCH, Vertex, and Thomson Reuters. This is also the model used under the Streamlined Sales Tax CSP program. This is a good alternative if a company doesn’t want to install and maintain the necessary software on its own system. Cloud solutions can be more cost efficient since the ASP will manage the infrastructure including system and content updates. If you decide a Cloud solution is the right option, ensure that you make arrangements for access to the tax data in the hosting agreement.
Cloud solutions usually don’t facilitate complex rules that the tax engine may offer in an enterprise/on-premise bolt on solution. These solutions typically are priced based on transaction volume. As a result, these solutions are better suited for small to mid-sized companies that have fairly standard tax profiles, are subject to standard sales and use tax and don’t have high transaction volume. These solutions are ideal for companies that have tax collection responsibilities in multiple states but don’t have a full tax and IT staff to support a system in-house. Most Cloud solutions can also provide sales tax compliance services for the filing and remittance of the tax.
5. Non-Interactive Solutions
As an alternative to the automated solutions above, there are non-interactive tax calculation solutions that require manual processing and updating. Applications such as Microsoft Excel or Access can be used to build templates that incorporate tax rules specific to your company for calculating tax on outbound invoices or procurement transactions. Customized web applications can also be created at reasonable costs. Bear in mind that you’ll need to manually maintain tax rules and rates to comply with tax changes as they occur.
This type of solution may be best for:
- Companies with limited billing systems that cannot interface with a standard third-party tax package
- Companies with a billing system that does not facilitate passing enough detailed information to the tax package
- Companies with users that are not connected to an interactive system at the time they are calculating tax.
Selecting the tax automation solution that’s right for your company is the first critical step in successfully implementing a solution. The next step is to have a comprehensive project plan and follow it in order to implement the system effectively.
I’ll be presenting a Best Practices in Systems Implementation webinar on October 30. During the webinar, I’ll teach you the steps in creating an implementation project plan and cover the best practices and potential issues that can arise throughout an implementation. Whether your company is implementing an automated system for the first time, changing systems, upgrading an existing tax system or expanding into a new market and/or new geographic area, this webinar will teach you what you need to know in order to do the job right.
Other recent “Sales Tax Automation & Software” posts by Diane Yetter:
- Selecting a Tax Automation Solution: 5 Options to Consider
- Sales Tax System Implementations: Selecting the Right Software