Setting Up Sales Tax Calculation for Your Business

Getting the right sales tax on your invoice is a pivotal step in managing your sales and use tax obligation. With cities, counties and states having their own tax rates, taxability rules changing among states and even local jurisdictions, it is almost impossible to ensure you add the correct sales tax to your invoice for a more complex organization. So how do you know what is the best solution for your business to get the correct sales tax on your invoices?

Once you’ve determined that you have a sales tax obligation, here are some questions to review and ask yourself to determine the best solution for your business.

1. Do I actually need software to calculate my sales tax?

There are two key factors necessary to calculate the applicable sales tax – (1) Tax rates; and (2) Taxability rules. (There are other aspects to consider including situs and exemptions, but rates and rules are the cornerstone.) In some situations, these rates and rules can be managed perfectly fine on your own without the need for sales tax calculation software. For example, if you’re selling tangible personal property (generally taxable) in just a few jurisdictions where the tax rates are easily accessible, sales tax calculation software is not necessary. 

However, it is considerably more complicated if you are selling tangible personal property across the country where you will need to understand all the current tax rates where you have a customer/client. For this, you can subscribe to a tax rate service that allows you to lookup current sales tax rates, upload the tax rates into your invoicing/ERP system and your invoicing/ERP system will calculate the tax. This can work very effectively with minimal upfront or ongoing cost. 

However, if you are selling something like telecommunications or SaaS services on a nationwide basis, or even things that are usually considered TPP but have different taxability rules across some states or jurisdictions, sales tax calculation software is much more important. 

2. What software solution best fits my business?

If sales tax calculation software is needed for your business, or you’d just rather rely on software to manage your sales tax calculation, there are additional things to consider to ensure you find the right software for you. 

As mentioned above, there are two key pieces of information required to calculate the applicable sales tax – (1) Tax rates; and (2) Taxability rules. It is important to ensure that the software you select has a deep understanding of sales and use tax rules and has a solution that maintains the most accurate rules and rates for your business. 

Today, most sales tax calculation software is delivered in the cloud via a Software-as-a-Service model. These tools automate the sales tax calculation process by integrating with the invoicing or ERP system typically via an API (Application Programming Interface). When it comes time to create a customer quote or invoice, the ERP system will pass certain data elements (customer location, product, sales amount, etc.) to the sales tax calculation system which will then calculate the sales tax and pass back to the ERP system the applicable sales tax. 

There is another important piece of information to verify with the solution you choose. Ensure that they can integrate or have the ability to create an integration for your ERP or billing system. Without this piece you will not be able to automate applying the correct rules and rates to your transactions in a timely fashion. 

With the right sales tax calculation software, you can fully automate this step of the process. Look for a solution that provides a modern architecture, robust rules engine, and transparency for reporting. Additionally, you may require more advanced calculation capabilities for multiple business lines, sales channels, revenue streams, or unique shipping requirements. If you’re dealing with bundled packages or heavily regulated industries, you might need a solution that can accommodate these specific needs as well. 

3. Can my sales tax calculation software manage my sales tax filings?

Can the sales tax calculation software also file the sales tax returns? Some software solutions provide an “auto-file” capability that will file the sales tax returns. However, there is more to sales tax compliance than just filling out the right paperwork and paying the correct amount. A true filing and remittance compliance process requires expertise and human oversight to ensure that no errors are made and accounts for ongoing changes within your business and the ever-evolving sales and use tax landscape. You can’t get that from an automated solution only.

These scenarios need human oversight – and often someone with sales tax expertise to manage. This is something not usually available within a software and if you don’t already have someone within your team managing the software with this expertise, you could have a real issue. TaxConnex is redefining sales & use tax management by combining industry expertise with the simplicity and security of our proprietary tax management technology. As dedicated practitioners, we’re an UPSOURCED part of your team, focused on your unique needs. We blend human oversight with innovative technology to conquer the chaos of sales tax management and provide peace of mind for each and every client.