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.