Make Taxes Less Taxing

A recent state appeals court ruling in New York that upheld a law requiring online retailers to collect sales tax on shipments to state residents raises the specter that all states may adopt a similar approach. Until now, only companies that have had a "nexus" (some physical presence like an office, store, and warehouse) were required to collect these taxes. The new law, passed in 2008, uses a novel definition of a nexus (something that automatically qualifies a corporation as doing business in a jurisdiction). Other cash-hungry states may find inspiration in the New York definition and either copy it or come up with other ways to create a nexus where none existed before.

This should serve as a reminder that if your company isn't already using software to do a more efficient job of determining what it owes in sales and use taxes and finding more effective ways of minimizing them, this time has come. Sales and use taxes can present a problem for any corporation doing business in multiple tax jurisdictions. In today's Internet economy, this can mean just about any company. Complications arise because each state, county, or city has its own rules and rates, and these are constantly changing. Keeping track of the rules and applying them accurately can be a burden, and mistakes can occur.

Many CFOs and treasurers believe that their ERP system can do all or most of the work for them. But this is not a good solution; you don't want to have to keep making changes to this core transaction management system, and the key part of any sales and use tax management system is its ability to keep up with ongoing changes. It's far better to pass the information contained in an invoice or other transaction to a thirdparty tax calculation application, and these records contain enough identifying data elements to enable your company to avoid mistakes in calculating tax liabilities. The tax logic that drives this tool typically can be configured to recognize the tax status of the customer at the location of the specific transaction as well as the tax treatment of individual products at that site -- for example, certain part numbers or SKUs may be exempt or qualify for more favorable treatment in specific jurisdictions.

Companies that operate internationally already have to contend with complex jurisdictional and reporting issues, and thus some tax software companies have developed considerable international expertise. This matters because, for example, if your corporation does business in the European Union and is shipping something between countries, you must apply the correct value-added tax (VAT) for that specific product/country combination. If you are claiming an exemption to the VAT, all documents must correctly reference the specific statute that provides this exemption.

In today's economy, the last thing that many companies want to do is to spend money on new software. However, there are software-as-a-service (SaaS) options that bring this functionality within range for midsize companies. Even if you think that you have your sales and use taxes covered with your manual processes today, you should look into adopting this software to save time and money.

See a larger version of "Going Soft on Taxes."