Review of Sales & Use Tax Systems -- 2006

Wal-Mart, Target and CostCo do it. So do Bob’s Hardware in Ostego, Michigan, the Valentine Diner in Clinton, Oklahoma, and even the Belly General Store in Atlanta, Georgia. Every business that sells, rents or leases a product collects and remits sales taxes to a variety of jurisdictions. For very small entities with one physical location, or nexus, doing business in only one city or state, compliance is generally not too daunting a task, but rather a monthly or quarterly task with which the business owner may need minor assistance.

But as a company’s geographic sales base grows more diverse through the addition of more stores and crossing state lines, the chore of reporting and remitting collected taxes grows ever more time consuming. Although not as complex an issue as income tax compliance, managing sales and use tax for a large company requires the constant monitoring of ever-changing tax rates in potentially thousands of jurisdictions, making sure the appropriate rates feed into the sales or financial management applications used by the company, ensuring that collected tax revenues feed into the proper GL accounts, and maintaining and completing returns for each of the appropriate authorities. For very large companies, sales tax compliance requires a dedicated full-time staff, but even for smaller companies doing business online or in a multi-state area, sales tax compliance can be a challenge, and dedicated in-house staff isn’t always an option.

Sales and use tax compliance software provides relief for most of these problems, automating much of the process and helping to prevent errors through the inclusion of reporting tools, management features and filing reminders. Such programs vary widely in their capabilities and, therefore, the companies that will benefit most from their use also vary, depending upon the needs of the business. For smaller entities, the primary need is keeping up with tax rate changes for all of the jurisdictions within that state. For larger firms, more complex systems are required.

The good news for small businesses is that there are many programs on the market that provide support for one or a handful of states. These systems need only monitor rate changes in a smaller area, which reduces the costs associated with the system, and the programs generally offer less integration capability, acting instead as an after-the-fact reporting and remittance tool. These factors combine to keep costs low for these small entities.

At the higher end of the spectrum are systems geared toward businesses with more complex compliance needs, offering tax tables for virtually all of the more than 8,000 taxing jurisdictions in the United States and Canada, from states and cities, to counties and special tax districts for transportation and emergency services. The vendors maintain these vast databases, keeping up with changes at every level and providing frequent updates to the tables that are offered either online or in CD format. In the case of web-based tax compliance systems, the tables are updated automatically by the program vendor. The programs in this group tend to offer greater sophistication, with integration and automation capabilities that allow the tax system to feed rates directly into the company’s financial management system, and automatically populates compliance forms with appropriate data, leaving the in-house manager or public accountant with primarily review and filing functions.

The continued use of the Internet by state taxing authorities has eased the filing and remittance process for many locations, allowing businesses to file and pay online. Most of the programs included in this review allow such functions. That said, these programs offer a diverse approach to sales tax compliance, based upon the needs of the business. From CD and online systems, to single state or omni-jurisdictional programs, to integrated programs that automate almost everything, sales tax compliance does not have to be the headache it once was and still may be for some businesses. Help your client assess his or her business’ needs, then find a solution that meets both those needs and their budget. 

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