A white paper from Avalara, Inc., a firm specializing in sales and use tax compliance for business, reminds us of the importance of properly collecting sales tax and managing tax exemption certificates.
Anyone who has survived a state sales tax audit knows that the price for non-conformance and even innocent errors can be very high, easily running into the tens of thousands of dollars. And these days, states are more eager than ever to find new revenue sources. Ensuring that you are consistently charging and reporting the right sales tax to each customer in each taxing entity has become more critical – and more complex – than ever.
Fortunately, for those doing business in many states and owing taxes to many taxing authorities, there are automated solutions to manage the process of exemption certificates and to ensure compliance.
Most ERP systems can be matched up with today’s better tax management systems. They require the addition of two pieces: Exemption Certificate Management (ECM) software, and tax decision software. Together, these two pieces can interact with ERP systems like Microsoft Dynamics NAV and others, to ensure compliance. While it’s beyond the scope of a blog post to give a detailed analysis, following is the simple version of how these things work.
(For a white paper on the topic, contact us or you can go directly to a provider such as Avalara. They provide a more detailed overview here.)
Standard Exemption Certificate Management software is installed in-house on your own computers and allows you to image, index and store all appropriate sales tax certificates. It will also help you manage the process of securing these certificates from customers, telling what certificates have been requested, received and so on.
Intelligent ECM software provides a similar service, but does it via the cloud so that all you need is a web connection. This version often integrates with your ERP software. Software updates are automatic every time you log in and usually included in your license agreement.
Next, your tax decision software helps you determine and manage the taxability and rates based on factors like the purchase order, the product being sold, the location of buyer and seller, and so on.
Once the rates and taxability have been determined this information can be fed into your ERP system so an invoice will reflect the correct sales tax amount. It’s all automatic and seamless. The biggest issue your company has to deal with then becomes requesting appropriate sales tax exemption certificates. The integration of both ECM software and tax decision software helps ensure that mistakes do not occur by ensuring that certificates on file are not expired, current and up to date, so the tax decision software is making its decisions based on accurate, up to date information. In essence, you can’t have one without the other.
Together then, the ECM and tax decision software programs ensure that the right taxing information is being fed into your billing system.
In the end, it’s all about ensuring that you charge and remit the right sales tax, each and every time. Since state tax audits are becoming increasingly more common, the pieces together ultimately provide the peace of mind a small business owner needs to ensure their own audit will not be a cause for undue concern nor unexpected expense.