Managing Taxes More Effectively with Software

Taxes may be inevitable, but they aren't immutable. Many companies could be using software to do a more efficient job of determining what they owe and to find more effective ways of minimizing it. Applications for this purpose have been available for years, but not every company uses one, and some that do may find that they will benefit from upgrading. Specifically, there are two types of taxes that software can help to address: sales and use taxes and income taxes.

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. In the U.S. alone, complications arise because each state, county, or city has its own rules and rates, and these change often. Unless you have only a handful of customers and operate in a limited number of places, keeping track of the rules and applying them accurately is a burden — but an avoidable one.

At first thought, it might seem that your enterprise resource planning (ERP) system could do the work for sales and use taxes. After all, this is the software almost all companies use to generate their invoices and purchase orders. But this is not a good solution because 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.

Instead, the information contained in an invoice or other transaction can be passed to a third-party tax calculation application, and these records contain enough identifying data elements to enable consistently accurate assessments. The tax logic can be configured to recognize the tax status of the customer at the specific location as well as the tax treatment of specific products at that site (for example, certain parts numbers or SKUs may be exempt or qualify for more favorable treatment in specific jurisdictions).

Some tax software companies have considerable international expertise. This matters because, for example, if your corporation does business in the European Union and is shipping something between countries, you have to 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.