The Sales and Use Tax Morass

It's hard to imagine a more Byzantine tax structure than the U.S. sales and use tax system. The United States has thousands of taxing jurisdictions. The rates they use and the rules governing compliance are constantly changing. Jurisdictional boundaries are fluid too, changing from year to year. Designed for the needs of the nineteenth century, when interstate commerce was relatively modest, the system is strained to the limit by the vast volumes of present-day cross-border trade, not to mention the ever-increasing tally of Internet transactions.

Staying on top of sales and use tax obligations means keeping a close eye on where your workforce and facilities are located. Rapidly-expanding small and midsize companies sometimes unknowingly create "nexus" -- a connection with a particular jurisdiction that generally arises from owning premises or having employees based there -- and the collection and filing obligations that come with it.

Then there's the problem of managing exemptions. Which of your products are tax-exempt -- and in which states?

Of course, transaction taxes are common in the rest of the world too, and an organization that decides to expand beyond U.S. borders will likely come up against some of the more complex species, such as value added tax (VAT).

Technologies that help companies cope with the ramifications of sales and use taxes are garnering more and more attention from tax executives, but a Business Finance online poll suggests that most companies still rely largely on their enterprise resource planning (ERP) systems, which must be carefully configured to manage tax data. When asked how their company manages its transaction taxes today, 18 percent of respondents reported that their organization mostly uses an ERP tool; 41 percent use ERP software together with manual processes.

It's worth noting that just over half of the participants work for companies with operations in 26 or more countries.

Corporate tax strategy tends to focus on income taxes, and companies are often unaware of just how much transaction taxes are costing them. But the costs in terms of headcount, advisory and consulting services, and tax research subscriptions -- not to mention penalties and interest -- can be substantial, and corporate tax leaders may want to investigate solutions that can help automate their sales and use tax processes.

Here are the complete results of the Business Finance poll:

How does your company manage transaction taxes today?

How many countries does your company do business in?