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.

It used to be that sales and use tax software had to be purchased and maintained on-site, and it was difficult for midsize businesses to justify those costs. Today, though, there are Software-as-a-Service (SaaS) options that bring this capability within range of midsize companies.

Income taxes are another matter. Almost all larger companies — and even many midsize ones — are missing an opportunity to manage these taxes more efficiently and effectively. On the efficiency front, our research shows that a majority of companies use spreadsheets to manage their income tax analysis, planning, and calculation. As a consequence, they waste a considerable amount of time dealing with errors, reconciliations, and the needless complexity that always arises when spreadsheets are used for repetitive and collaborative processes. Companies spend so much time simply assembling the numbers to figure out what they owe and checking to make sure that the calculations are correct that they have little or no time to determine how to minimize the taxes that they pay.

There is a better way.

Step one in upgrading your company's income tax management capabilities is to create a separate data store that keeps track of all of your company's financial information from an income tax perspective. Especially in larger companies that have multiple entities and complex ownership structures, a good deal of what tax departments do is to translate the business data from ERP systems (which are configured for organizational, not tax, purposes) into a structure relevant to tax processes.

There are several approaches to automating this. For example, if your company already has an enterprise financial data warehouse, adding tax dimensions should not be difficult. Some statutory consolidation software packages (which amalgamate the results of multiple ERP systems according to Generally Accepted Accounting Principles) also can be helpful. Beyond that, there are tax calculation and analytical tools that make it easier to assess options and craft strategies.

Taxes are a cost of doing business, but for many large and midsize businesses they need not be as costly as expected. Using software to manage the tax calculation and reporting processes can reduce this administrative burden, freeing up the time of highly compensated resources to work on more valuable projects. Software can make it far easier to achieve and demonstrate tax compliance and reduce the chance of expensive errors.

See "At a Glance: Software for a Taxing World [1]" here.