Sales tax software

Why Sales Tax Software Is So Useless

Many companies have invested heavily in tax software that is capable of calculating the tax rates in various states and localities only to be disappointed with the results.

In reality, there are only three challenges:

  • The systems are expensive.
  • They still require human updates to work well.
  • Sometimes they cause more harm than good.

Other than that the software works great.

The biggest problem with sales tax software is that the complexity of sales and use tax and the constant shifting of regulations means that it must always be updated.

Even if you have the software installed, you still require a person to keep it up to date and determine taxability! In most cases, this eliminates the value.

Software and algorithms are great at clear-cut rules, but often the taxability of a given item is determined by context, not rules.

Some things can be taxable for one reason and tax exempt for another and building this kind of complexity into a system is very difficult and incredibly time-consuming.

Take, for instance, clothes.

Companies may not realize that clothes are taxable in California but not in New York.  So they may incorrectly accrue use tax in New York or not accrue tax in California.

Temporary help is another example.

Typically temporary help is a taxable service.  In many cases, however, the way the vendor invoices for the service determines taxability.  If you work with a vendor to change how they bill you may save the tax. Sometimes changing a single line on the invoice leads to a significant exemption.

Building context like this into software is very difficult.

Worse, even perfectly maintained software can still end up codifying mistakes.

One client assumed that they were using a use tax accrual report to determine use tax due.

However, they had programmed the report with a small error.

One click of a mouse somewhere deep in a menu and the team ended up basing their calculations on a sales tax paid statement.  As a result, they were accruing and remitting use tax to the state on items which they had already paid the sales tax.

The system ensured they paid the tax twice and the company never even realized it.

Tax software also struggles in an environment with a centralized payable system.

The question that arises is whether to accrue use tax at the property level, where an item is shipped (or used), or in the state where the checks originate.

The programmatically unsatisfactory answer is: it depends.

Take the example of a mortgage company with an enterprise center in North Carolina (NC).

NC has a specific use tax regulation that says that any software license used in the enterprise center is exempt from sales tax, only if the enterprise center resides in NC. So no need to pay tax for software in the corporate center in NC.

Pennsylvania is the other way around.  A percentage of a company’s employees worked outside of PA and used software (Microsoft, Oracle, SAP, etc.) housed at the corporate location in PA. The company paid sales tax on the entire license amount.  But their obligation was based only on the percentage of software out of state employees used.

Adjusting the tax was a substantial saving that the company almost missed.

This is all too complex for tax programs to get right.

Or, perhaps better said, an alogrythm can pick up these nuances if a human programs it correctly.  But getting the programming right becomes a full-time job in its own right.

If you have the budget and the human capital, tax software can help.  But, for companies without billions of dollars of sales, the cost is almost always prohibitive.

Alternatively, you can bring in sales and use tax specialists.  You point us in the direction of your documents, we find your money, and you get a check.  No programming required.

You Are Leaking Cash – Overpaid Sales And Use Tax

In our experience, most companies are leaking cash, by overpaying their sales and use taxes.

Most companies have overpaid tax, and they don’t even know it.  You may have all of the processes in place and designed and implemented the best system, but just not realize that you aren’t catching that trickle of cash casually making its way to the state.

A trickle that you don’t need to be funding.

We like the analogy of air conditioning with the window open.

Maybe you buy the latest programmable thermostat, insulate the walls and do everything you can to ensure that your air conditioning is efficient.

Then the temperature rises, the air conditioner clicks on and hours later you realize the kids left the windows open.

The whole time you have been leaking cash through the window – despite all of your best efforts.

Sales And Use Taxes Are Like An Open Window On A Hot Day With The Air Conditioner On

Just like leaving the window open, it is very easy to leak sales and use tax cash.  As with the air conditioner: nine out of ten times nobody knows.

Mistakes can surface on either end of the sell-buy process. Vendors may charge sales tax on exempt items or calculate it incorrectly.  This might not even be a mistake – your vendor’s understanding of the situation may just be wrong.

The complexity of sales and use tax makes accruing and charging the appropriate taxes in all situations impossible for vendors.

Another source of error could be something as simple as a coding error prompting your accounting department to pay money you don’t really owe.

We knew of a hospital where bill-paying software had been set up so that any item for which they’d been charged sales tax automatically accrued use tax, as well.  One tiny little switch somewhere deep in the system.

But this means that they were paying twice, to the tune of almost $800,000 over three years. No one knew who was responsible. It was just overpaid tax money leaking out of the company.

Sometimes an error is only an error when you have enough knowledge to recognize it as such.  One client classified a $10 million dollar capital improvement as just that and paid what thought was the appropriate sales tax.

That seems straightforward enough.  But, when we looked at it we didn’t see a $10 million capital improvement, we saw an ad. The state agreed and refunded the tax.

Who is at fault for the cash leak?

Most of the time, nobody at the client is to “blame” per se.  Accounting and finance often do a great job, but just don’t have the specialized expertise.  They spend their time making the company work, not pouring over sales tax laws, regulations, and case law.

That is the right decision, but it doesn’t mean that the company isn’t leaking money.

To make sure, call in the experts.  We ONLY pay attention to sales and use tax and we know the ins and outs.  This gives us the experience to understand the complexity, know when to argue and when to back off.

Or, perhaps better said, we make sure the windows are closed so that you don’t waste money.

Of course, when air conditioning leaks out the window it is gone forever – money, on the other hand, we can get back. 

We recover that overpaid tax and we close the leak so that the overpayments slow.

 


 

Nobody can afford to have their team bogged down by sales tax and use tax management. 

Better to rely on outside sales and use tax professionals who live and breathe the details.

That is what we do.  We study sales tax and use tax continuously.  It is all we do.  We know where to push and where to search to find money you didn’t know is yours.

Interested in what we can do for you?  Let’s talk. 

Know When to Challenge Sales Tax Law for a Refund

The laws governing sales and use tax are complicated.

They vary by state, and their interpretation can be controversial. When is arguing the finer points likely to benefit you financially?

Even the best CFO’s struggle with sales and use tax because it is a minor focus area.  Financial officers should spend their time on more critical initiatives.

However, the opportunity to reduce the cash flow finding its way into state coffers is a real one – the challenge is in knowing when to push and where to dedicate the effort.

The Jurisdiction Puzzle

First, it’s important to understand that the seller’s location drives sales tax, and they may have a physical presence in multiple states.

Even where the seller does not charge sales tax on an item, you become responsible for paying use tax instead – unless it is exempt.

Here’s an example: If you buy a phone from a New York vendor and will use it in New York, you’ll be charged sales tax.  If you buy the same phone from a company in Florida and they ship it to you in New York, they won’t charge you either Florida or New York sales tax.

But, you will remain responsible for paying the tax.

Companies must keep track of such out-of-state purchases, fill out a schedule and file a use tax return. It’s time-consuming and confusing, and mistakes happen easily.

Even when the tax rules are clear, taxability can be confusing

The heart of the confusion lies in all of the gray areas that exist in interpreting sales and use tax law.  Take the example of medical devices in Pennsylvania.

In Pennsylvania, medical devices are tax-exempt if used for therapeutic purposes, but taxable when employed for diagnoses.

If a hospital group is using specific equipment exclusively for therapy, then they’re entitled to a refund on any sales tax they were originally charged.

The fun starts with equipment that serves both therapeutic and diagnostic needs.

In Pennsylvania, if something is used for therapy at least 51 percent of the time, it is exempt. In Illinois, the magic number is 40 percent.  And you need to work through this for each piece of equipment.

Or take the situation where a healthcare practice buys 10 of the same medical device.  The buyer may not know the exact use upfront, but they pay sales tax on all everything.  Some of it is almost certainly tax exempt, but sorting this out and documenting is significant work. Most organizations don’t have the resources to sift through years of records in order to establish their right to a refund.

Cases like these are straightforward, and it is always worth going through how purchases were classified and correcting the classifications based on real use.

States expect reclassifications and the process is simple.  It is just a lot of work. 

Then there is the case where the rule itself is vague. Vaguery is an opportunity to challenge.

One of our clients installed a stadium scoreboard.  Installation cost millions, and the team paid a hefty sales tax bill invoiced by the construction company.

But once installed, the scoreboard also advertised a local business.  The advertisement placed the scoreboard firmly in a gray area.

We argued the purchase classified as “outdoor advertising,” the state agreed and issued a refund.

The state doesn’t always agree so easily.

The state may have come back with a partial refund or a different interpretation, and we would have had to decide how to proceed and how far to push.

Often the states will offer to settle for a percentage of what is due.  They do this to avoid setting a precedent and sometimes negotiation is the best solution.

Sometimes though, the best solution is to keep arguing, the difference is knowing how strong your claim is.

Getting Tax Relief Requires Experience and Knowledge

The key is deep knowledge of how each state approaches sales and use tax to pull together a tax relief strategy.

Then it takes time and elbow grease to work through the details of the refund application and argue the points to argue.

Sometimes you take the partial refund and sometimes you keep going.

It all depends…

Who can afford to have in-house staff bogged down by this process?  Better to rely on outside sales and use tax professionals who live and breathe the details.

That is what we do.  We study sales tax and use tax continuously.  It is all we do.  We know where to push and where to search to find money you didn’t know is yours.

Interested in what we can do for you?  Let’s talk. 

How Manage Use and Sales Tax

Keeping up with sales and use taxes requires a level of sales tax expertise that most companies don’t have.

Forty-seven states that collect sales tax.

Then there are the municipalities.

To that add the endless exceptions that are in constant flux.

Properly managing this sales tax morass requires a broad and continuously evolving understanding of the regulations combined with the ability to implement.

First, get to know the code.

In Pennsylvania, there’s a book that contains the sales tax codes.  It is about an inch and a half thick.  It is even less exciting to read than you might imagine.

Each state and many municipalities have the same thing, which equates to a very long list of very dry regulations to read, understand and be able to implement.

Second, study the case law.

But understanding the law and codes is often not enough.  Tax laws are notoriously not fully inclusive, creating gray areas where tax questions are open to interpretation, and legal decisions must be interpreted or argued.

So, you will need to understand both the tax codes and the legal decisions that interpret the tax codes.

Third, develop the systems to manage the payment process

The next step is to apply these to your payment processes.  The application of tax rules often falls to Accounts Payable, but without the specialized knowledge of the codes and legal decisions, they are fighting a losing battle.

Accounts Payable will need a standardized process and relevant software to manage each purchase, assess the tax implications and pay the necessary tax.

Fourth, implement an internal audit process

You will also want to continuously review past payments because as laws change, there are opportunities to recover additional taxes.

How to manage sales tax and use tax

The only sure way to manage sales and use tax consistently over time is to have a dedicated staff that understands the regulations, keep up with the changes and, importantly, stay on top of all of the relevant transactions.

In a company with billions of dollars of transactions, this means a team of people focused exclusively on understanding sales and use tax.

The challenge for smaller companies is that the complexity still exists, so they need the same team.  But they don’t have the transactions to make this financially viable.

There isn’t enough money on a continuous basis to justify hiring a full staff.

Ultimately this means that sales and use taxes are managed using general rules and using best effort. The standard approach makes sense and is the right way to go, but it also means that companies end up leaving a lot of money with the states that they could recover for themselves.

The good news is that you can recover the money without cost.

All states have a process that allows you to file for sales tax refunds. Generally, you have three years in which to file for a refund.

So, the best process for most businesses is to bring in an expert who can work on a commission fee basis. Let them sort this out and file for a refund.

You should use this process to update your rules and adjust how you pay the taxes and apply for exemptions to minimize the overpayment going forward.

The world will shift between now and three years from now.  Therefore bring in the experts again in three years. They find money for you again retune your systems, and you are ready for three more years.

This gives you most of the benefit of a team for a fraction of the cost.  And you don’t have to worry about getting every transaction right.

 

At FMCC we are experts at getting your money back.  Find money you didn’t know is yours – let’s start now.

 

 

Sales tax refund

Get A Use or Sales Tax Refund

When we review use and sales taxes to find refunds we come across two different opportunities.

The first is purchases that are a black and white mistake.  At some point along the chain, an item is classified as “taxable.”  Our client pays the sales or use tax but doesn’t owe anything; this payment is a misclassification.

The second opportunity is more complex and derives from an understanding of the interpretation of the law, which is not nearly as black and white.   The key is to understand how the interpretation has changed over time apply for a refund based on the change.

This isn’t as straightforward as a misclassification but is very common and can be a significant opportunity.

Tax misclassifications and why they happen 

Sales tax misclassifications occur all the time.  There are a million reasons why but generally they come back to the complexity of managing sales and use tax and trusting that their vendors have it figured out.  Companies either need to have a team dedicated to checking every purchase or use tax rules.

A dedicated team is expensive, so rules are the norm and these rules often lead to misclassifications.

Reviewing for misclassification is straightforward: we go through your purchases and check how they were classified.  We put purchases in the right category and can generally find tens to hundreds of thousands of dollars of refund money.

Arguing for a gray area

Sometimes, however, the opportunity is not due to a misclassification so much as a misinterpretation.  Something might fit into multiple categories and arguing one over another makes the difference between taxable and not taxable.

Take the example of a scoreboard.

One of our clients was a professional sports franchise that built a 10-million-dollar scoreboard.

This scoreboard is fixed to the building. It is wired in; it is real property.  All of this means that it is taxable, and the team owed hundreds of thousands of dollars in tax.

Here is the catch: In their state, while real property improvements are taxable, outdoor advertising infrastructure is not taxable.

And this scoreboard has a WB Mason advertisement on it.

In the team’s original interpretation, the ad was secondary, so they paid the tax.  But we knew that the state took a broad view of outdoor advertising, so we made the case.  The state looked at it, saw the ad and agreed.

The team got their money back.

Sometimes this is not clear-cut.  The state could have come back and decided this wasn’t advertising or agreed that they didn’t know.  But even here, there is an opportunity for a refund.

The state is often concerned about setting legal precedent.  If the scoreboard case were to make it to court, the court might find that all scoreboards are ads.  Such a finding could lead to a flood of refund applications and a need to pay huge refunds.

The state often wants to avoid this, so even when there is a gray area that favors the state they often settle and pay the refund rather risk a lawsuit that changes the law.

So why didn’t my tax guys pick this up?

In the case above, the baseball team came back to us and said, “Why didn’t our accountants pick this up?”

The fact is that the nuances of sales and use tax aren’t their job. Accountants and tax professionals mainly focus on income tax.  They make sure your books add up, and they aren’t focused on sales and use tax.

And they often don’t have the expertise to do so.

Knowing when to argue and when to move on takes a lot of specialized knowledge and numerous trials and errors.  Some firms have this and are happy to roll up their sleeves, dig and perform a comprehensive review.  But that is the exception.

It also requires a different filter.  The construction company did not know about the difference in tax, the team didn’t know about the difference, and everybody generally agreed that the scoreboard was a capital improvement.

Only when we considered the scoreboard through the filter of sales tax did we see it as advertising.

And that is the value of bringing in the experts to review both misclassifications and those gray areas.

It can be worth millions.