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Accounting Technology Sales & Use Tax: Lifting Compliance Burdens

As sales and use tax compliance becomes more challenging, software vendors are beefing up their offering for tax practitioners.

By Carly Lombardo

February 2004 — Sales and use taxes are imposed by more than 7,500 state and local authorities, each with its own set of rules that business owners and their accountants are expected to learn, understand, and comply with, wherever they have customers.

With the increased complexity of state taxes, aggressive state auditors, changes in corporate structure, and decreased staff sizes, even more challenges are surfacing.

These challenges are sparking many accounting professionals and their clients to utilize the technology offered by vendors such as RIA, Vertex, CCH, Velosant, BNA Software, and AccountantsWorld. In turn, vendors are working hard to better serve professionals by forming alliances and enhancing their current products.

For example, New York-based RIA and San Ramon, Calif.-based Sabrix recently announced the integration of RIA’s InSource Sales and Use Tax return compliance software with Sabrix’s Application Suite. The integration allows companies to initiate a financial transaction in legacy or ERP systems; have the Sabrix system perform all sales and use tax determination, calculation, and reporting; and complete the tax filings with a direct connection to the InSource compliance software. “Sabrix is generating an extracted file of transaction data from their program to feed InSource. The integration will allow our joint clients to take advantage of the functionality for tax determination and return compliance,” says Robert Irving, product manager at Thomson/RIA.

Meanwhile, Salem, Mass.-based Taxware merged with Velosant in August to offer integrated accounts payable, accounts receivable, tax calculation and compliance, and cash management. Both companies are operating units of eOne Global, and although Velosant will integrate Taxware’s product offering, the Taxware brand continues as a product line under Velosant and can be purchased independently.

However, the Taxware product suite’s main goal remains the same—to keep up with all law changes and accommodate all rules and rates.

“Accountants need to keep up with all changes and rules because when they miss them states can come in with audits,” says Jon Abolins, vice president of government affairs at Velosant. “We strive to accommodate all law changes and rules.” He provides this example of supporting specific tax rules: Clothing in many cases is exempt from state and local taxes. However, in Massachusetts, only clothing items costing up to $175 are exempt from sales tax; any item costing more is subject to a 5 percent state sales tax.

Taxware’s Sales and Use had two components. The first is STEP, the Sales Tax Exemption Processing System, an exemption certificate management and tracking system that helps businesses avoid costly exemption errors through automatic handling and documentation of tax exempt sales and purchases. The second, the VeraZip module, determines taxing jurisdiction assignments. Based on ZIP codes, the system matches state, ZIP code, city, and county information to tax jurisdictions.

Expanding Possibilities

Berwyn, Pa.-based Vertex has introduced the Sales Tax O Series, and expanded the functionality of Sales Tax Q Series (formerly known as Quantum for Sales and Use Tax), by adding Vertex Analysis and Planning Solutions.

The O Series is built on a platform that supports multiple environments including Web Services, which simplifies integration to financial systems by using Extensible Mark-up Language standards.

“We wanted to make it easier for our customers to integrate the product with ERP applications as well as have a consistent user interface, which makes it easier for them to learn and operate the full suite of O Series products that include Sales Tax, Consumer Use Tax, and Value Added Tax,” says product manager Keith Reiner.

The O Series automates tax processes through the use of integrated taxability management tools. It also maintains rates and rules used for calculation and offers enhanced jurisdiction identification capabilities.

Improving the tax calculation process is just the beginning with the client/server product, the Q Series, which provides customers with analysis and planning tools and exemption management tools to help set up business requirements.

For example, many companies cannot present a valid certificate on audits, and thus risk penalties. The Vertex Exemption Certificate Manager, a Web-based storage tool, automates the collection and maintenance of the sales tax exemption certificates. “We’re always trying to save our users time, and once they save time, they need to show their clients what they can now do with the time. The addition of our value-added products not only helps our customers, but it reduces their clients’ audits and penalties,” says Mike Breeze, product manager.

Another factor that differentiates the company is Vertex Services, which provides consulting, training, and product support focused on aligning customer tax and technology resources to help minimize the time to production.

Mark Sergas, market development leader, says, “Customers often have never had to have that much interaction between tax and technology stakeholders prior to implementing tax automation products.” Services include installation and testing of tax applications, configuration, and customization of tax tools and applications, along with project management and system process flow analysis, integration of tax applications with client financial systems and documentation of system configuration and internal controls.

Keeping Up with Compliance

Kim Wilmoth, a CPA at Jacksonville, Fla.-based Wilmoth and Associates, says, “Sales and use tax compliance is challenging, as it demands consistency, accuracy, and timeliness. “As companies expand their sales and operations into more states, compliance costs grow.

Also, when the economy is on a downward trend, states audit even more aggressively, which translates into an increased number of notices a company receives each month. Wilmoth also notes, “states are insisting that tax returns be submitted via electronic data interchange and tax payments via electronic fund transfer.”

This means firms must streamline sales and use tax compliance and return filing for their clients. Wilmoth also feels it is vital to cover the complete sales and use tax process. “Clients want to direct their attention to the business’s core competencies and strategic direction rather than the complexities of sales and use tax,” she says. “Firms must remember the process is much larger in scope than the preparation of the tax returns.”

Wilmoth breaks the process into the following 10 areas:

  • Creation and management of the taxability matrix.
  • Determination and preparation of state and local registrations.
  • Determination of available technology.
  • Structuring and testing of data feeds.
  • Preparation of the tax returns and payments and remittance of each.
  • Management of resale and exemption certificates.
  • Management of tax notices.
  • Creation of an audit trails.
  • Management of the tax function.
  • Management of audits.

Serving Users

BNA Software agrees that accounting firms support end users in number of ways, and not just with rates and compliance. According to Susan Jones, marketing communications manager, consulting is an important way for firms to help their clients.

“Accounting firms often do a nexus, taxability, and risk analyst on sales and use tax, and they advise clients where to locate and how to set up financial systems for their business,” Jones says. Also, accounting firms advise clients about how to integrate sales tax rates into point-of-sale systems, and often keep clients abreast of sales and use tax issues of importance.

Washington, D.C.-based BNA Sales & Use Tax Rates and Forms can benefit accounting firms with small-business clients, those operating in seven or fewer states, who wants to automate their compliance. The software lets accountants apply built-in special tax rate treatments, such as combined/split rate, overriding rates, and maximum tax levels, as well as special districts. BNA Sales & Use Tax Rates and Forms start at $1,245.

Wilmoth and Associates performs sales and use tax processes for commercial service companies with multiple states, utilizing CCH’s sales tax software, specifically ZIPSales Returns and ZIPSales Database. “CCH’s products have more completeness than other products out there, from the client’s front-end, where CCH provides rate lookups, through e-commerce billing packages to automated form population and electronic filing,” says Wilmoth.

The ZIPSales Database is designed to locate and calculate the correct sales and use tax rates for the users’ transactions and determine taxability. Then, ZIPSales Returns prepares and files sales tax returns and remits taxes. Riverwoods, Ill.-based CCH takes care of populating the sales returns and maintaining the Web-based system.

CCH also offers Sales Tax Alliances, relationships with third parties that add value to CCH solutions. David Fisher, sales manager for the Sales Tax Group, says third parties have built utilities for specific billing and ERP packages that are designed to utilize the CCH databases. “These third-party applications allow customers to integrate the rates and rules contained in CCH databases with billing and ERP applications in order to calculate tax,” he says.

RIA Compliance also completely automates the compliance process. According to product manager Irving, the Carrollton, Texas-based company’s InSource Sales and Use Tax comprehensive return coverage, flexible data sourcing, and e-filing capabilities put them ahead of their competitors. The system costs $26,250 for the first year with 40 hours of implementation support bundled. The renewal price is $16,750 annually.

InSource also generates related check requests, and produces “null” returns for jurisdictions without current sales activities to avoid costly failure to file penalties. It formats and transmits the electronic returns for those requiring or preferring this method. Irving says, “The null return feature helps retailers that operate kiosks during the holiday season only, but are required to file sales tax returns year-round.”

“The enhancements for 2004 will include full PDF support to help ‘paperless office’ initiatives for our clients, and industry-specific compliance support beginning with food and beverage returns. RIA will continue to roll out new paper and electronic returns bases on our client’s needs,” he adds.

Controlling Engagements

Hauppauge, N.Y.-based AccountantsWorld provides professionals with Sales Tax Online.

President Chandra Bhansali, says, “More accountants understand the advantages of online applications, and our product lets accountants take full control of client accounting and engagements they lost because of PC applications.”

Sales Tax Online supports California, Connecticut, Illinois, Massachusetts, New York, Ohio, and Pennsylvania.

It can be used from AccountantsWorlds’ Accountant’s Office online or directly from AccountantsOffice.com. Further, tax returns can be saved in clients’ Cyber Cabinets, an online filing system.

“The accountant is able to customize the application differently for each client, based on that client’s needs and abilities, establishing control over the entire workflow process for everyone’s mutual benefit,” says Bhansali. Sales Tax Online has both an annual fee of $199 per year per state, and a $4.95 pay-per-return fee.

RIA offers InSource Express RS Sales and Use Tax product, designed for smaller companies operating in several states. Electronic filing and Internet return support where offered by state revenue department include Florida, Tennessee, and South Carolina.

InSource Express starts at $1,000 for filing in one state and is priced based on the number of jurisdictions, legal entities, and users.

A Roadmap to Sales Tax Outsourcing

Always looking for future opportunities, Wilmoth and Associates has studied the staffing requirements for multi-state sales tax compliance and has found that, for most companies, outsourcing the sales and use tax process makes more sense than keeping it in-house.

Wilmoth provides this example: At a minimum, a company needs at least one supervisor and one sales tax clerk dedicated to the function. The supervisor should have a background in tax and will need to have access to research materials. The cost of these two positions, including benefits, can range between $75,000 and $100,000. “However, the average annual cost of tax return preparation for a multi-state client with whom we prepare, say, between 375 to 755 returns annually is between approximately $37,500 and $50,000,” says Wilmoth.

Wilmoth has created a roadmap for what she believes would lead to successful sales tax outsourcing. It begins with understanding the client’s industry and business practices. Then she suggests discussing the level of service that clients desire.

The services can include:

  • Review current sales and use tax compliance status
  • File new and renewal jurisdiction registrations
  • Data management
  • Tax return preparation and filing
  • Tax payment administration including process or request checks for payment and mailing
  • Tax return remittance
  • Jurisdictional correspondence
  • Reconciliation of sales tax liability accounts
  • Send copies of tax returns and supporting schedules to clients

Once the services to be provided are established, the firm will need to provide follow-up support for tax issues and questions. Also, discuss the long-term vision for sales tax compliance, prepare a needs analysis, select the software product to fit the client’s needs, and create a detailed project plan and time-line.

“I’m always thinking of what’s in the best interest of the client. The bottom line with outsourcing is you’re audit-proofing the whole sales and use tax process,” says Wilmoth.

Carly Lombardo is Associate Editor of Accounting Technology and can be reached at carly.lombardo@thomsonmedia.com.