Whether they are payroll taxes, sales taxes, or value-added taxes, taxes are a problem — a problem to track, a problem to calculate, and a problem to report. Sales and use taxes are particularly onerous, and with the Supreme Court’s South Dakota v. Wayfair decision last year, they are becoming even more so. We surveyed seven of the major sales tax software and service providers, asking what effect the decision has had on them and their clients, and how they view things changing in the near future.
It’s all about the money
Part of the problem is that sales and use taxes are a major source of revenue for states and municipalities. With lots of pennies on the line, every entity that collects taxes has adopted a “no mercy” attitude. If your clients have what the tax collector sees as theirs, they intend to collect it, which translates to increased compliance issues.
“Technology has fundamentally changed commerce, and the challenges state and local governments have faced in adjusting their taxation mechanisms to keep up have substantially contributed to a ‘tax gap.’ Even before the Wayfair decision and the resulting sea change in nexus requirements, governments sought to fill this gap though aggressive compliance requirements that make keeping up with the pace and rate of change a constant challenge,” said Charles Maniace, director of regulatory analysis at Sovos. “The U.S. is far from alone in attacking the growing tax gap. Across the world, revenue authorities have embraced technology as a means of both expanding their tax base and collecting every cent owed. ... Multinational organizations with complex global supply chains need to understand these compliance requirements and have a plan to adapt.”
Lizzy Greenburg, chief marketing officer at TaxJar, said, “Complexity is by and large the greatest issue in sales tax today. From economic nexus legislation to marketplace facilitator laws, to confusing and scary letters from California, it’s a bit of the Wild West right now.”
“The single biggest challenge in sales tax is that individual states have autonomy in forming their laws,” said TaxCloud vice president of business and corporate development Patrick Riley. “This isn’t just about differing rates but also specific product/service treatments and exemptions, multiple jurisdictional levels within a state (such as state, county, city sales taxes) and now economic nexus thresholds varying by state given the Wayfair ruling last June. This level of complexity makes it difficult for online sellers to not only determine if they need to collect in a particular state, but also figuring how to comply once they make the determination that they do need to collect.”
Added Chris Livingston, director of operations at Vertex Inc.: “Regarding use tax, many businesses don’t understand that these rates and rules are not the same as sales tax and are often audited on use tax alone.”
Stirring the pot
A lot of the upheaval and change in the sales and use tax area stem from Wayfair. “The speed and complexity of the sales and use tax compliance landscape is outpacing the ability of traditional solutions to comply,” said Sovo’s Maniace. “As a result, tax and IT leaders have begun to approach tax compliance more strategically. This manifests itself in a movement away from point solutions intended to address a particular compliance challenge, and toward modern, adaptable and scalable cloud applications. Wayfair opened the eyes of many organizations of all sizes that regulators are evolving, too, and they will find ways to collect what is owed. More organizations are looking for ways to solve the problem for good with complete end-to-end solutions — so they are positioned to grow when and how they want and don’t need to worry about tax getting in the way.”
Thomson Reuters is another vendor that has seen an uptick in business. “The Wayfair ruling has created a significant increase in the number of businesses reaching out to remedy their amplified risk where doing business. Many have seen their nexus profile change dramatically overnight and are very aware that non-compliance could have a significant impact on the bottom line,” said Tom Farmer, a solutions consultant at the company.
“From our perspective and that of our users, the overriding issue for sales and use tax revolves around the post-Wayfair aftershocks that include congressional action in 2019; individual state legislative, administrative action in adopting and implementing South Dakota-like economic nexus statutes; and how states who have passed South Dakota-like economic nexus legislation for out-of-state online sellers are implementing the legislation — for example, many states passed such legislation post-Wayfair but have not yet built the infrastructure to collect the tax, provide for the filing, and other admin details,” said Wolters Kluwer senior director of global content assets Mark Friedlich.
Vertex’s Livingston agreed with the other vendors surveyed: “Since the decision, we’ve seen new customer growth across all segments and industries. Customers are still adjusting to the expansion of their nexus footprint and realizing they are required to calculate and collect tax, file returns, and pay tax liabilities in an increasing number of jurisdictions. As such, we’ve also seen an increase in usage (transactions, exemption certificate images and records and returns) and questions from within the existing customer base, as well as prospects.”
New days, new features
With all of the fallout from Wayfair, we wondered if the vendors were adding new features to their offerings. Bloomberg Tax has seen more interest from the international community and added support for those clients. “Since the Wayfair decision, we’ve observed additional focus on sales and use tax nexus, with heightened interest from the international business community,” said Christine Boeckel, deputy editorial director of tax. “The nexus and constitutional questions related to sales by non-U.S. companies have been centered on the impact of U.S.-international treaties on states’ relationships with non-U.S. companies and their home nations. This is an area where there’s not yet much guidance from the states. The results of our 2019 annual ‘Survey of State Tax Departments’ will help shed some light on these growing international issues and reveal how the state revenue departments are currently dealing with these situations.”
Some of the new features that Bloomberg Tax added are Bloomberg Tax Rate lookups and exports tax rate data powered by geolocation technology, which combines pinpoint locations with detailed jurisdictional boundaries. Also new is the Advantage Excel Add-in address import feature that quickly imports hundreds of locations so rates and rate changes can be monitored.
Thomson Reuters is another vendor that has added new features this year, launching a completely redesigned interface and user experience of its tax technology platform. The Thomson Reuters ONESOURCE on-demand cloud solution is built to scale for any size company. Thomson Reuters ONESOURCE Determination in the cloud also features recently launched Tax Content for Retail. U.S. retailers in 2017 saw 1,357 tax rate changes, including 595 new tax rates alone. Thomson Reuters also launched ONESOURCE Determination for Oil & Gas to help tax professionals in the oil and gas industry automate complex motor fuel tax determination and calculation requirements, according to Farmer.
Sovos detailed its recently launched S1 cloud platform, which includes modern software architecture, an updated development framework, and a highly reliable, scalable and secure cloud infrastructure and the Intelligent Compliance Cloud, which supports many different compliance workflows globally.
Avalara has also been busy upgrading its offerings according to Marshal Kushniruk, executive vice president of corporate development: “Some of the newest features in Avalara AvaTax include Economic Thresholds for Remote Sellers, which, post-Wayfair, provides a visual dashboard on a state-by-state basis showing an Avalara AvaTax customer which states they have, or are about to, trigger economic nexus in; and Notice Manager in AvaTax Returns, which allows Avalara customers to let Avalara manage their tax notices through AvaTax, replacing a fairly manual and confusing process.”
Many vendors have software products that integrate with accounting and ERP applications. But what if one of your clients is using an accounting system that’s not integrated with a particular vendor’s sales tax application? Does it still make sense for vendors to provide stand-alone sales tax software?
TaxCloud’s Riley replied, “The answer is a resounding yes — as evidenced by the companies like TaxCloud that are competing in the space. We are constantly surprised that accounting platforms and payment processors (in particular) are for the most part not offering sales tax as part of their services. Logically, wouldn’t having a payment processor provide real-time sales tax calculation as part of the payments process make incredible sense? We think so and believe it will happen someday.”
And while TaxJar does offer integration with some accounting software applications, Greenburg echoed Riley’s sentiments: “We strongly believe that there is a market for stand-alone sales and use tax software. U.S. and international sales tax is such a complicated space with so many nuances, rules, legislation, and a rapidly changing landscape. While many accounting software products cover a wide range of needs for a business, sales tax is an area that requires such precise attention and dedicated research that we believe that as long as the legislative complexity continues, there will always be a need for a stand-alone market for sales tax services.”
Sovos’ Maniace was not quite as positive: “There is a diminishing market for point solutions that solve just a piece of the sales and use tax puzzle. It’s critical for businesses to turn to scalable solutions that can support a variety of compliance measures, from tax determination to exemption certificate management to filings. Having to manage multiple stand-alone solutions is too cumbersome and leaves too much room for discrepancies that are sure to be uncovered during audits.”
Bloomberg Tax also does not specifically integrate with accounting systems. “Bloomberg Tax does not have a formal program to work with any accounting software vendors. We do have a rate file available in TXT format that can be imported into most ERP or POS systems,” Boeckel said. “Depending on the unique needs and sales and use tax workflow of the business, there is certainly still a need for stand-alone sales and use tax software. However, the trend in the industry is for the stand-alone software to integrate with other existing applications.”
Finally, we asked if the vendors had a program in place to deal with smaller clients who might need sales tax and use software. “Smaller businesses, especially those selling online, are faced with unprecedented sales tax compliance complexity as a result of the Supreme Court decision in South Dakota v. Wayfair,” Avalara’s Kushniruk said. “This new era of complexity requires technology tools to mitigate risk and uncertainty. Avalara’s pricing model is built to scale up... And for small businesses that wish to completely outsource the preparation and filing of sales taxes, Avalara provides a complete end-to-end solution called Avalara Returns. Avalara Returns uses data from a customer’s ERP, accounting, e-commerce, CRM, invoicing or billing application to automatically prepare, file and remit returns in each jurisdiction where tax is owed.”
TaxCloud’s Riley is also positive about smaller clients: “The challenge for small business is that they simply don’t have the resources and time to tackle the sales tax challenges on their own. Our platform is designed and priced for small to midsized businesses. It’s a self-service, easy-to-set-up-and-use platform that takes the sales tax burden from the shoulders of small businesses.”
