The Supreme Court’s 2018 Wayfair decision was a sea change in the ability of states to collect sales and use taxes by redefining what could be considered taxable nexus. It was also a boon for those vendors in the software space that provide the sales tax calculations for locations that states could now claim were subject to sales taxes, even if they were thousands of miles away from where the business was actually headquartered.
On the other hand, it wasn’t so great on the seller’s side of the sales and use tax equation. The pandemic amplified the need for even very small businesses, many of which conducted business across state lines or even across the country, to have the capability of calculating sales tax liability in geographically distant locations where they had substantial internet-based sales. With lockdowns and shelter-in-place orders, people often turned to the internet to make purchases that formerly were done in nearby brick-and-mortar stores.
Add in the pause in many state authorities’ ability to conduct complex sales tax audits during the pandemic, and you have a recipe for a blitz of audits now that people are slowly returning to the office and states have developed the capability of conducting even complex audits remotely.
While the move to online sales is a boon for many businesses and state and local tax authorities, it also creates more complexity for your clients, who now have to deal with mounting sales tax compliance issues.
Dealing with the challenges
Software providers are dealing with the increasing challenges faced by both clients and firms. We asked a virtual roundtable of vendors what they see as the major challenges, and how they are facing these to provide better service.
“With the South Dakota v. Wayfair decision three years in the rearview mirror, many sellers are confronting head-on their increased sales tax collection, remittance and compliance responsibilities,” said Charles Maniace, vice president of regulatory design and analysis at Sovos. “As much of the rest of the world adopts expansive destination-based taxation regimes, companies are also evaluating their level of global compliance and whether it meets their growth objectives. The critical first question is whether their existing processes and solutions are sufficiently effective and scalable to support them and keep them safe from audit exposure as they grow, or is the time right to rethink their compliance approach. From our perspective as a global provider of tax compliance solutions, our most important objective is to make the adoption and utilization of tax compliance technology as easy as humanly possible.”
TaxJar did some significant research into the difficulties businesses are facing, according to chief marketing officer Sara Strope: “We actually recently commissioned a survey of more than 500 financial professionals and asked this very question. The top four challenges the survey participants cited were state registrations, integrating data sources/importing transactions from an e-commerce platform to a sales tax platform, calculating sales tax rates, and understanding nexus determination.” (The full survey and analysis are available at www.taxjar.com/guides/future-of-ecommerce.)
Strope also pointed out that it’s never been harder to be compliant, mentioning that in the past year, there were more than 500 different sales tax rule and rate changes in the U.S., including changes to product taxability, exemptions and nexus thresholds.
“The biggest issue facing businesses is increasing sales tax complexity, and getting and staying in compliance,” according to Sona Akmakjian, global head of strategic accounting partnerships at Avalara. “For accountants, the overarching issue is keeping current with regulatory and legislative changes, and putting processes and technology in place to ensure the accountant can keep up with the demands of their clients efficiently.”
Michael Bernard, vice president of tax content strategy and operations and chief tax counsel at Vertex, added, “More often than not, customers must pull data from multiple sources (sales systems) in order to file their monthly returns. These customers are working to ‘automate’ this process through machine learning so the entire returns compliance process can go smoothly, taking less time and fewer manual steps. A number of companies have set up marketplaces on their own commercial websites. So, meeting the marketplace facilitator rules has been challenging. Distributors and manufacturers that were never subject to sales and use tax collection (due to sale for resale) must now file tax returns (zero liability) due to Wayfair. This has created an unnecessary compliance burden on them.”
One last consideration is addressed by Perry Hatch, senior director of product management at Wolters Kluwer Tax & Accounting, who pointed out that the pandemic has amplified the need for more skilled practitioners and client staff: “Buyers often come to us when they realize that their growth and success has also created new levels of audit risk. The risk of noncompliance takes center stage as businesses enter new markets. Compounding the concern is the time required to prepare for an audit defense.”
Hatch continued, “As demand for tax talent continues to grow in response to Wayfair, many businesses are rapidly losing talented professionals to retirement. Replacing talent in a depleted market forces many organizations to hire novices that don’t bring a comparable level of tax expertise as their retired counterparts, putting a renewed focus on providing training and automated tools to manage the workload.”
Meeting the increasing need
Identifying problems is just the first step. As important is how vendors are addressing these problems. Hatch detailed Wolters Kluwer’s approach: “CCH SureTax automatically tracks, manages, and reports economic nexus through in-system notifications based on customer-specified parameters for all sales — covering both the online and brick-and-mortar sales thresholds in specific jurisdictions. Though many states are passing ‘marketplace facilitator laws’ that shift the burden of collecting sales and use tax to the marketplace facilitator, the seller must still handle all other tax compliance with particular focus on managing all sales tax remittance and filing for all other sales transactions, tracking warehouse inventory that may result in physical nexus, and maintaining records of all sales in the state, regardless of source of sell. Wolters Kluwer Tax & Accounting uniquely offers rate research and development services for customers in new, breakthrough industries or with new product categories that are not covered sufficiently by existing rates and rules.”
Determining nexus is something that came up again and again in the comments from our virtual panel, as it determines total tax liability. “The large increase in both e-commerce sales and doing business online (e.g., remote work) have greatly increased the number of businesses who are meeting new sales tax compliance requirements for the first time,” TaxJar’s Strope said. “Nexus can be a challenge even for mature companies, but for those just starting out in e-commerce it’s particularly vexing. TaxJar helps our customers track and understand their nexus thresholds with a Nexus Insights Dashboard and notification system that pulls in real-time transaction data to show your nexus exposure. It makes it simple to see in which states you’ve reached nexus, and warns you when you’re approaching nexus in new states as well.”
Sovos’ Maniace pointed out another important consideration — accessibility to the computations. That’s an important point when your client’s business spans several time zones: “Modern tax demands technology that’s always on, always available and always secure. To that end, Sovos has made substantial investments in a first-of-its kind, active/active data center infrastructure. The active/active configuration, where our tax determination solution is fully up and running in two geographically disparate data centers, works 24/7, 365 days a year, to ensure constant uptime and maximum transaction processing speed. Having the assurance that tax will always calculate, and calculate quickly, is enormously important for organizations with an expanded e-commerce presence.”
In many cases, your clients will turn to you for guidance on how to approach and implement their sales tax computation and reporting. Almost all of the vendors we queried maintain some type of partner relationship with accounting practices.
Sovos takes a number of different approaches to working with firms and clients. According to Maniace, this can include collaborating and working side by side to solve shared clients’ tax compliance challenges globally, typically combining their SaaS solutions with their accounting partners’ advisory and other professional services offerings. Sovos also has accounting firms that implement its SaaS and API-delivered solutions. Finally, accounting firms can also use/license Sovos’ SaaS solutions to “power” the firm’s compliance (managed services) practices.
That’s something to give serious thought to in these days of client accounting services.
Avalara has also partnered for many years with accounting firms, with a focus on firm growth and client satisfaction. In the past year they have rolled out new and enhanced programs, including an accountant referral program, where they work directly with accountants’ clients to assist with sales tax automation needs.
Akmakjian also detailed several other programs: “Avalara’s Certified Implementation Partner program includes online training, continuing education, and support, giving firms the expertise to assist hands-on in implementing Avalara AvaTax, Avalara Returns, and Avalara CertCapture. And in 2020, we introduced Avalara for Accountants, offering automated sales tax returns and other services designed by accountants, giving firms access to the same Avalara cloud technology used to process millions of sales tax returns and remit billions of dollars each year.”
Vertex, meanwhile, partners with CPA.com, a subsidiary of the American Institute of CPAs, creating the Firm Advisor Program that enables CPA.com member firms to provide sales and use tax advisory services to clients utilizing their proprietary Accountants Console to manage their clients from a single dashboard. Through this program, firms can provide outsourcing services around calculation and compliance using Vertex technology or simply refer their clients to work directly with Vertex for their sales tax automation needs.
Small is good, too
Our final question to our panel was how they address the needs of smaller businesses that have wide nexus needs and questions, but may not have the budget or tax expertise that a larger company can apply.
Like many of our respondents, Sovos provides tax automation solutions for both enterprise-level organizations and small and midsized businesses. “Supporting smaller organizations requires solutions that are easy to understand, easy to implement, easy to use, but at the same time are scalable as the company grows and evolves,” Maniace said. “Smaller companies are often primarily focused on bringing new and innovative products and services to market. While unquestionably necessary, for smaller businesses tax compliance is often a distraction and sometimes even a barrier to growth. At first, a growing organization may benefit from solutions that focus primarily on sales tax filing, but later, as they grow, they may care more about real-time determination, certificate management, and even AP accuracy. At Sovos, we are able to support them at every step of that journey.”
TaxCloud takes a somewhat different approach to affordability. “As a Certified Service Provider under the Streamlined Sales Tax program, TaxCloud is a very affordable solution for businesses, as we get paid by the SST member states for managing sales tax for our clients. Also, our service is very easy to set up, comes with many integrations with leading e-commerce platforms of all kinds, and literally can be set up in a matter of minutes for many businesses.” said vice president of business and corporate development Patrick Riley.
Vertex is another vendor that’s able to accommodate the sales tax determination and compliance needs for companies of any size. “Typically, smaller businesses face perplexing sales tax challenges because of complex and rapidly evolving state and local rules. Consequently, small businesses don’t have the resources to support all the various states’ sales tax requirements and look to outsource the sales tax determination and compliance process,” said vice president of channel sales Bradd Wildstein. “Vertex has a unique program that partners Vertex with the accounting/CPA firms to enable them to provide end-to-end sales tax consulting and outsourcing services to help small businesses handle their multistate sales tax obligations and ensure they are in compliance.”
The bottom line is that the sales and use tax conundrum isn’t likely to improve at any time in the near future. And your clients are expecting you to steer them to the right solution — one that provides the best fit for them and, hopefully, improves the profitable relationship you enjoy with them.