Next Generation Solutions for Online Sales Tax Compliance

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Conversations with CEO’s CFO’s and any other c-level executive all indicate that these people are aware of sales & use tax issues that face their company, how difficult it is to comply, and has heard horror stories of audits, fines an penalties.

A survey of CFOs of small companies found that they spend, on average, at least 2 hours per sales tax return, per filing period. This number increases dramatically as the size of the company grows and revenue increases putting a greater burdon on any existing Online Sales Tax Solution.

This presupposes that they have good First Generation Solutions. Even with good First Generation Solutions in place, companies of all sizes spend many employee work hours in making sure that data is processed accurately, and transferred from one solution to another. A survey of small business managers found that they spend a couple of hours a day in transferring transaction and deposit data into their financial systems.

Larger companies were found to have many FTE’s dedicated to these functions. This data processing is necessary to address the back end functions of tax compliance – reporting, filing and auditing.

This high level of involvement, activity and knowledge is a strong indicator that something is wrong with the system. Are these people concerned with how authorization is processed by the financial institutions?; do they even know who all the players are in a typical transaction authorization process? No! and neither should they. Business executives should have to focus on building their business, and not on figuring out their response to the state tax auditor, explaining why a software developer does not know why a business must distinguish between a customer who purchased their doughnut at the counter, or ordered it while sitting at a table. Nor should they be treated as common thieves because they paid the correct taxes, just to the wrong county.

Recently, Next Generation Solutions have started to emerge into the market. The goal of Next Generation tax compliance solutions is to remove the pain typically associated with tax compliance, and, as a single source, provide for a single solution that addresses all the elements required for compliance. Next Generation Solution are deigned to automate processing of repetitive and time consuming tasks, and eliminating data and system gaps. This is a long winded way of stating that Next Generation Solutions provide for a seamless solution, which removes the entire burden of compliance from the retailer. By using a Next Generation solution, the retailer should be reassured that all their needs to address compliance are being taken care of, and they can focus upon their main goal, that of generating business.

The importance of Next Generation Solutions is best understood in light of the sense of complacency companies are lulled into when, as modern businesses, they use technologies to help management work more efficiently. Management tends to set a goal of ‘figuring taxes on transactions, and these First Generation Solutions achieved that goal. Management mistakenly assumed that using some form of tax solution achieves the goal of accuracy and efficiency. The availability and use of First Generation Tax Solutions tends to lull the business owner to believe that they have taken sufficient steps to maximize efficiencies and reduce liabilities.

In fact, tax auditors will not forgive a retailer for incorrect taxes calculated and paid, even if a reliable First Generation Solution was in use and relied upon. First Generation Solutions that generate tax forms, means that these forms need to be printed, reviewed, signed, inserted into an envelope, and mailed – in a timely manner. In addition to these hard costs, there are soft costs, which are more difficult to quantify. Forms engines might save some time by eliminating manual entries, however they do not save time over fully automated systems. For example, printed forms require higher levels of review maintenance and human intervention, to distribute, complete, physically manage, and store. The information in the form has limited access and visibility – limited to those individuals with actual access to the physical document. A Next Generation Solution should perform all of these tasks electronically and automatically. By automatically generating and performing an e-filing on behalf of the retailer, and storing the form in information systems readily available to the retailer, the Next Generation overcomes all those deficiencies associated with printed forms. The retailer need not be concerned that they have to activate the function enough time in advance to accommodate internal review and approval processes as well as postal delivery delays.

Printed Forms also do not indicate incorrect or incomplete data until physically reviewed. More concerning is that printed forms can be modified or changed – erroneously or intentionally, so that even if the form
is generated electronically

from a First Generation Solution, there is no guarantee that it will not be changed, and filed with the incorrect data. More concerning – that the correct return be filed with the incorrect agency, or the incorrect form will be filed – any of which might automatically trigger an audit. Electronic forms of Next Generation Solutions have built-in, auditable, internal rules of logic that prevent these types of errors and events from occurring. In effect, the systems receive all data directly from the transaction engine and transaction tracking engine, assuring the use of only transaction data, without external intervention, and that it is filed on time, to the correct recipient. While Next Generation Solutions will allow manual bypasses, these are more difficult to implement, and will always record and indicate not only what change was made, but by whom, and when.

A reproducible, auditable trail is the true differentiator between First Generation Form Filing tax solutions and those of fully automated Next Generation Tax Solutions.

Next Generation Sales Tax Solutions are the true sales and use tax compliance engines. The ability to determine the accurate tax rate in real time, factoring complex issues such as transaction nexus – where the transaction takes place, and taxability of the given product on a line by line item basis in that given nexus, is but one of the issues the engine needs to address. Another point of complexity is the ability to provide transparent, valid audit trails, providing documentation for each and every decision pertaining to the transaction made at any given point of time during the life-cycle of the transaction. The Next Generation Tax Solution provides a unified, single point of access, data-set that seamlessly integrates with all tax calculation, collection and payment modules, rather than requiring different audit trails for each of these steps, leaving to the auditor the act of reconciling these different trails, hoping that the benevolence of the auditor will lead to the desired results.

Next Generation Solutions should focus upon flexibility, maintainability; integration and reliability. Performing only two or three of the functions associated with tax compliance, while admirable and more advanced than what First Generation Solutions typically provide, will still not achieve the goals of the Next Generation Solution. The solution needs to perform all four of the functions under one package. The Next Generation Solution should be flexible enough that it allows for adaptability across different systems, allowing to address many different needs of the retailers.

In sum, the perfect Next Generation Solution would be (i) hooked straight into your transaction engine; (ii) provide the information necessary to assure that the correct tax is being calculated; (iii) save the transaction and tax data for further reference; (iv) be hooked into systems that will allow it to track the transaction through its life cycle; so that (v) any changes made to the transaction are reflected in the system; (vi) on a periodic basis as may be determined by statutes and regulations – compile the data necessary for filing; (vii) generate a return and report necessary for complying with statutory filing requirements; (viii) make the return available for review and approval by the retailer; (viii) file the return automatically and electronically straight into the systems of the state taxing agencies on the required date, helping the retailer avoid fines, penalties and interest associated with late filing; (ix) obtain from the retailer funds necessary for payment of tax proceeds; and (x) pay the taxes owing on a timely basis, applying electronic funds transfer methods to assure timely payment at the last possible moment without incurring penalties for late payment.

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