What Business Leaders Don't Know About Their Sales Tax Compliance
Most IT and tax teams are unsatisfied with their current tax software. Additionally, businesses still underestimate the likelihood and costs of sales and use tax mistakes. Here’s how to address these issues at your company.
Business leaders understand that sales and use tax compliance is a necessary task in running a business and that it’s complicated. But let’s face it, they also consider it (when it’s considered at all) a back-office function. Perhaps the time is right to look a little deeper. After all, sales and use tax compliance practices touch nearly every customer, supplier and distributor transaction; it’s regulated by numerous state and local taxing authorities—each with their own rules; and it can drain human and financial resources, including IT resources, if poorly managed. What other process touches so many vital components of your business?
But this is a Tax Department issue, why am I reading about it here? Many executives don’t realize the role that IT plays in fulfilling their sales and use tax obligations. A business either relies on native functionality within their ERP (not a best practice, by the way) or utilizes sales tax software from outside vendors. Either way these systems and the requisite updates, maintenance and business reporting can involve significant IT resources.
Okay, my IT resources are involved and I’m using outside sales tax software, I’m good, right? Not necessarily. Recent research of over 100 IT and Tax professionals, conducted by Wolters Kluwer Tax & Accounting and Market Measurement, a market research consulting firm, revealed that 76 percent of participants are very/somewhat likely to change. Think about that. Most companies have a cross-functional team review sales tax software before purchasing including IT and Tax Depts., however their satisfaction level remains low. This seems a troubling finding for a process which impacts so many business transactions.
State and local tax authorities are becoming more aggressive in their tactics for collecting sales and use taxes as other sources of revenue become strained
So what’s going on? Well, not surprisingly, each function has their own set of requirements and they want to see those fulfilled but often times there is little recognition of other important requirements. IT is looking for technology compatibility (does it work with our ERP?), ease of implementation, low maintenance and that it has appropriate security protocols. All valid requirements. The Tax Team is looking for accurate and comprehensive sales tax rates and taxability rules, timely updates to those rates and features, such as reporting, to streamline monthly tax activities. Again, all valid.
So what happens next? Well, in many businesses IT has the budget and their resources are normally stretched so the scales tend to tip toward the technology requirements. Well then, why are so many IT folks still dissatisfied? Because, over time, the impact of the tax requirements become more pronounced and may require IT resources to address but, at a minimum, they impact the overall financial health of the business.
Consider that based on a 2016 market survey of over 260 Tax Professionals (Wolters Kluwer and the Aberdeen Research Group), nearly 97 percent of businesses faced some type of sales and use tax audit during the last five years; and that many (34 percent) had been audited more than five times. Penalties from negative audits can reach as much as 2 percent of a company’s revenues (that’s $5M on $250M in revenue). Who wants to be the business leader that oversaw the purchase of a system and who supports a practice yielding that kind of results?
Okay, attention grabbed? What do I, as a technology and business leader, do? Here are some solid steps we recommend:
1) Assess the Risk–The numbers above are significant and it’s worthwhile to find out where your business stands.
• Talk to Your Team–Ask your IT staff who work with and support the sales & use tax software and the Tax Team what they’re hearing. Are they sensing frustration? Do they have to get involved in updating the tax software, in creating regular or ad hoc reports? How much time is it taking?
• Talk to the Tax Team–Ask the folks who are running the day-to-day processes—collection, remittance, reporting and audit response—if they feel there are any undue risks in your current procedures. Based on the 2017 study, nearly 48 percent of businesses (between $100M - $1B revenue) cited improved “accuracy of sales tax rates and taxability information” as a critical area for improvement. That is the absolute core of staying compliant across all the jurisdictions your business operates/sells in.
2) Make a Plan–If the challenges are significant enough to warrant change, it’s got to be raised, discussed and prioritized. Again, based on the 2017 research, almost half (it happened to be 48 percent) cited dissatisfaction with their current solution as a driver to change. This time through, we recommend addressing the business/tax needs first, accuracy of rates and ease of use)—but not to the exclusion of IT requirements (i.e., technical compatibility).
3) Budget–It’s understood no major (or minor) changes happen instantly and without budget and human resource impact. Scope it out, bring in vendors who firstly meet your requirements (tax-oriented solutions with compatible tools) and who can help develop the business case.
4) Set it in Motion–Take the first step and the rest will follow.
What can I expect as a result? Here are the results when top companies, as identified in the 2016 market study, took strategic action to overhaul their sales and use tax process:
• Only 1 percent of their audits resulted in fines over the past two years.
• Achieved an 8 percent improvement in time spent addressing sales tax errors over the past three years.
• Gained a10 percent improvement in cost of handling audits over the past two years.
These investments in sales and use tax automation software tools and accurate tax rates also reduce the need for IT involvement on a day-to-day basis. Improving the sales and use tax process additionally frees up the tax team to focus on providing strategic guidance for the business—all of which support business expansion, whether that be geographic, e-commerce, portfolio growth or acquisitions.
State and local tax authorities are becoming more aggressive in their tactics for collecting sales and use taxes as other sources of revenue become strained. That, coupled with the findings mentioned above, pose real business risks so, if you want sales and use tax to remain a well-run but back-office function, it may be time to give it a little love.