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Videos | How to Avoid the Pitfalls of Manual Sales & Use Tax Management

For growing ecommerce merchants selling hundreds of products into multiple jurisdictions, sales tax compliance is a nightmare. In this session we will cover what you can do to help your company achieve compliance and audit protection with an automated sales and use tax management solution.
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Video Transcript

Keeping track of interstate tax requirements has always been a complex ordeal for businesses. The basic truth of it is it is time consuming and daunting and it's not much fun. For ecommerce stores it's even more of a nightmare. Avalara has been offering Miva Merchant users immediate and precise tax services in more than 12,000 taxing jurisdictions in the U.S.. With complexities such as that, automation just makes sense. It can save you time, it can save you money and it can save you headaches. Avalara are old hats in this arena. They've been serving businesses of all sizes from headaches since 2004. Today, Matt Martin, my colleague here, Avalara can fit into your ecommerce big picture. Hi, my name is Matt Martin, I appreciate the intro. I hope everyone is doing well today. Thank you for joining us for this webinar hosted by Avalara. We are the leading provider for sales tax automation and compliance solutions. So today we're going to discus when doing it yourself doesn't necessarily mean do it best. My role here is a Partner/Manager. I know that sales tax isn't the most interesting subject and can sometimes be daunting, but I want to shed some importance on automation for compliance. Let's get started. A quick overview of what we will cover is:

  1. State of Our States
  2. Why Sales Tax is Hard
  3. Challenges of Manual Sales Tax Compliance
  4. How Technology Can Help
  5. Q&A


State of Our States

  • States are still recovering from the Great Recession
  • In 2013, 31 states projected budget deficits totaling $55 billion
  • NRF estimates $24 billion in sales taxes goes uncollected on the Internet


Therefore

  • As tax-collecting agents of the State(s), they are looking to your business to find more money
  • This increased focus creates compliance risk for you

While States are beginning to recover from the recession, their focus on sales tax remains keen. States are hiring auditors and efforts to collector revenue previously unreported. States want their money. In California for example, they're planning on hiring 20 more auditors over the next two years and I believe that in California, I believe they have over 100 auditors on staff currently. So as a business you carry the responsibility of collecting or remitting those taxes on behalf of those states. So let's look at some quick numbers:

  • $20,000,000,000
  • $55,000,000,000
  • $107,000,000,000
  • $130,000,000,000


Not sure if anyone knows what these numbers represent, but these are actually the state budget gaps over the last four years. Billions of dollars. Let's take a look at two more: Market Forces: Uncollected Sales Tax:

  • $25,800,000,000
  • $12,500,000,000


As you can see from above, this is uncollected Sales Tax and you can see it's actually growing, this is over the past two years. So it's online retailers, online sellers and people taking payments through mobile applications. The states want to get in on that action. So, increasing tax rates, it's typically frowned upon by the public, right? Therefore, states are changing the tax base. Just as I stated, this changes how sales tax is collected. So it's no longer just a cash register or an invoice from an accounting system. Mobile devices and online shopping carts need to be able to calculate tax at a gps or ip level to be 100% compliant. So we need to adapt and keep up with these expanding markets. Let's talk a little bit about why Sales Tax is hard. Here we have a map of the United States. All of the different colors that you see on the map, those are all taxing jurisdictions. So before we get to that, let's read off this slide:

  • 150+ million mailing addresses
  • 12,000+ jurisdiction rules
  • 35,000+ sales / use / rental tax rates
  • ~3 M product / service exemptions
  • 750,000+ buyer / seller exemptions


So, what does it take to comply with over 12,000 tax jurisdictions? In terms of complexity, these jurisdiction lines are constantly changing as well as the tax rates. So let's drill down and we'll take a closer look at zip code inaccuracy. I'm going to focus in on Denver, Colorado. We're going to look at two different addresses. So here's the first address. So if you look at these two addresses, which are basically next-door neighbors, one is 5% and the other is 3% and they are right across the street. If we look at this address over here he has to pay less sales taxes. You can see the complexity of the jurisdictions. Again, it's always changing and it's very complicated to keep track of. So zip codes can get you into trouble.

  • They can change on a monthly basis
  • They are not assigned to all physical streets, just those that receive mail
  • Do not account for special tax districts
  • There can be multiple sales tax rates within a single zip code.


They can almost certainly lead to calculation mistakes and they can lull you into a false sense of security. So if you base your sales tax on zip codes, you risk applying the wrong rates and remitting sales tax to the wrong jurisdictions. Why? Because zip codes do not identify which tax region and address they belong to. In fact, zip codes do not even designate specific cities. So using zip codes to determine sales tax rates may prove accurate some of the time, however, using the rate from the wrong jurisdiction, or leaving out a special tax may lead to huge hassles such as audits, penalties and fines. We don't want this. Sales tax rates consist of several layers of tax. We have the state, the county, the city, local, and any special jurisdiction as well. The number referred to as the total sales tax rate is really just the sum of those tax rates. Each jurisdiction is defined by a variety of criteria and can vary from one address to the next. It is not unusual to have multiple sales tax rates within a single zip code. That's why it's inaccurate. So how is Avalara solving this problem? We are doing this by verifying the jurisdiction in an exact location, not a zip code. So here at Avalara we have incorporated a gps like technology to assign the tax rate. So this illuminates issues in which you overcharge a client sales tax, which is obviously going to create a customer service issue, cause friction between you and your customer. Or under charge a client sales tax and risk getting an audit. Challenges of Manual Sales Tax - we're going to talk about what goes into it and what you guys need to do to remain in compliance. I want to start with this: Sales and Use Tax Compliance Believe it or not this came from Wakefield Research 2013, 52% of accounting professionals agree that completing a marathon would be easier to accomplish than understanding sales tax compliance laws. So when it comes to sales tax, accuracy is everything. Sales tax is a complex statutory requirement and a highly evolved process. Managing sales tax manually is a labor intensive and costly exercise and it can lead to inaccurate results. So in 2013 Wakefield research found that 50% of businesses believe that a sales tax auditor would find a mistake. At with the average total cost of $96,552 for businesses to manage a sales tax audit can be very costly. That's a big number. So those people don't think about the time that goes into compliance such as collecting and storing certificates, etc. Look at the slide here to see what's involved: Even small companies spend significant time on manual compliance:

  • Researching Tax Rates
  • Building Tax Tables
  • Researching Taxability
  • Collecting Certificates
  • Storing Certificates
  • Running Reports
  • Filling out Tax Forms
  • Mailing Returns
  • Paying Taxes
  • 12.7 monthly hours calculating sales tax
  • 18.2 monthly hours managing exemption certificates
  • 11.0 monthly hours filing and remitting sales tax


So, the point here is that you should be focusing on what you do best, growing your business. Not on trying to understand and crack the code of the complex world of sales tax. Product Taxability What is taxable in one state, may be exempt in another. Similar products might be taxed differently. Different industries have varying taxability rules. Now here's an example of how products are taxed differently. Here’s a Milky Way original. It is non-taxable because it contains more sugar than flower. Then here's a Milk Way Midnight Dark that is Taxable because it contains more sugar than flower. Now you might not sell candy, but the point here is that it's very complex in terms of product taxability because it varies from state to state. So pretty silly right? Basically two candy bars made by the same company, ones taxable and one's not. So you would want to check with each jurisdiction for unique product taxability. And again, product taxability laws are not consistent, similar products might be taxed differently, and different industries have varied taxable rules. Taxability laws are changing. It's recommended to review taxability on your products and services, especially if you're adding new ones. So without having sales review tax experts interpreting laws for each and every taxable state and county and with a sophisticated tax decision making system, it is very difficult to assure that all taxable transactions are properly taxed. So, it is essential for a seller to know what is taxable in each jurisdiction to prevent tax exposure or future liability under audit. Also, organizations need to have the knowledge of what is not taxable in order to not overcharge customers tax and becoming the potential victim of a class action lawsuit. The more a company can automate the decision to tax the process the more they can minimize exposure and tax risk. Just to read off a quick list of the following industries that have varied taxability rules:

  • Software and Hardware
  • Digital Goods
  • Services
  • Medical Device Equipment
  • Food and Beverage
  • Clothing Apparel
  • School Related Products
  • Dietary Supplements


This really is just naming a few. Taxability Matters Ok, so taxability matters - I've got a few boxes up here and I want to start with the top right where you guys are in New York. This is very ridiculous and very silly and I'm not sure if you're aware of this but in New York City you can go into a bagel store and you can purchase a whole bagel. If you buy a whole bagel, you're not going to pay sales tax. That bagel is exempt. However, if you go into a bagel shop and you want them to slice it, toast it and put cream cheese on it, that sliced bagel is now taxable. If we look down at the middle of my slide here look at Takeout in Colorado. On the left hand side of that are straws, cups and lids, which are all taxable. On the right are cups, and they are exempt. Exempt Certificates State Legislatures decide what comprises the tax base - what is taxable and what is not.

  • Product based foot (but not candy), Rx & Services


Legislature also allows for exceptions to otherwise taxable items

  • Use based - the exemption is based on how the item/service is used
  • Entity based - the exemption is based on who is purchasing the item/service


5 states do not charge sales tax at a state level

  • Nomad (NH, OR, MT, AK, DE)


Types of Certificates Multistate Tax Commission Multijurisdictional (MTC MJ)

  • Resale ONLY
  • Only for states that approve it
  • Caveat on several states listed that it can only be used if NOT registered in the state (Basically a "gotcha")


Streamlined Sales Tax

  • Resale ONLY
  • All exemption types should be approved (but some states are unclear and seem to dispute this)
  • Limited states but can have multiple on the form


State Specific Forms

  • Fill in forms
  • State Issues forms - NM NTTC, WA Resale Permit, etc.
  • Combo - FL Annual Resale Certificate DR 13


We can see the different kinds of certificates that you would need. So the difficulty here is knowing which certificate you need and where to find those forms. Once you do have them, you have to have the customer fill those forms out and then you manage those certificates so if an auditor needed you to find them you could. So it's not so easy. On top of that, certificates expire so now you have to stay on top of expired certificates. You have to know which certificates are coming up to expire and then you have to get the customer to resign up with a new form. Again, not easy and very time consuming. 

 

Sourcing Rules

So now we have to take into account the sourcing rules on top of everything else we've just discussed. So most states have a destination based sales tax, which means that the sale is thought to take place in the jurisdiction where the product is ultimately used or where it's shipped to or picked up from. A few states have an origin-based sales tax, which means the sale is considered to take place at the place or location the sale is completed or the seller’s business location. If you were running a business in an origin-based state you would collect sales tax on all of your retail sales. However, if you were running a business in a destination-based state, you would not have to collect your states sales tax on sales that are shipped out of state. You would also not have to collect sales tax from the customers state unless you have Nexus or a physical presence also known as where you have to collect sales tax in that state. So the customer would simple pay the sales and use tax on their own. 

 

Nexus 

Nexus, where you are required to collect sales tax. This is just another piece of the sales tax puzzle. So if you have Nexus or a physical presence in any new tax jurisdictions this past year, have you expanded your field sales force or resellers channel, did you attend or participate in a new trade show, are you selling or servicing products in new areas? Each state is different when it comes to defining Nexus. In some states simply attending a trade show creates Nexus.  Make sure that you review your Nexus states and status and get an experts assistance to be sure that you are compliant. Those are some of the questions that you can see on my slide here that you need to be asking yourself. 

 

  • Remote Sales Force
  • Traveling Sales People
  • Contract Labor
  • Company Representatives
  • Own or Lease Property
  • Promote Products and Services
  • Trade Show Participation
  • Ecommerce Sales


Sales Tax management may sound easy, all you have to do is calculate, report, return and remit. However, there are a lot of behind the scenes activities that go into trying to get it right. 

  • Researching Tax Rates
  • Building Tax Tables
  • Researching Taxability
  • Collecting Certificates
  • Storing Certificates
  • Running Reports
  • Filling Out Forms
  • Mailing Returns
  • Paying Taxes


You would have to research tax rates and remember rates change monthly so you have to stay on top of that. Then you have to build out tax tables, you have to constantly update this as well. Once you build your tables you have to then import that into your erp and shopping cart. You might have to do that weekly or monthly, depending on how often the rates change. Then you have to research the product taxability. You have to collect certificates, you have to store certificates, you have to run reports to get the sales tax data, then you take that data, you have to fill out your forms for remittance to file with the state, you fill out the forms, you mail the returns and then you pay your taxes. So even after putting a lot of time and effort into getting it right, there is still a lot of room for error. 

 

How Technology Can Help

 

Avalara is the fastest, easiest way to calculate sales tax. This is actually what needs to happen, a one-second-response time. So let's take a look at the nine steps of what needs to happen. 

 

In Real-time (Sub 1 Second)

  1. Validates / corrects address
  2. Applies sourcing rules (origin / destination / hybrid)
  3. Automatically assigns correct jurisdiction
  4. Applies current, up-to-date tax rules and regulations
  5. Verifies for exemption status
  6. Identifies product taxability
  7. Verifies for tax holiday status
  8. Sends correct sales tax calk back to checkout
  9. Stores info for future remittance


Let's dive into how this works. Avalara provides an end-to-end compliance model that we accomplish via automation. So instead of researching rates and putting out tax tables, implementing tax processes, companies that use Avalara install a software connector that leads directly for this instance to Miva. We'll link Miva to our web servers. Because it's cloud software, Avalara is always keeping up to date the tax rates, rules and boundaries automatically. When you enter an invoice or take an order online, Miva communicates with our web service and sends a little encrypted xml file with the transactional data and we calculate the tax and we return it back automatically into your system. That happens really really fast, literally four-tenths of a second for a round trip calculation. At the end of the month you no longer need to run reports or fill out forms and cut checks and mail them out to tax authorities. When you've processed all your invoices you can login to your admin counsel and you do a quick reconciliation and Avalara will file and remit your taxes automatically. So you will pay Avalara one amount and we take care of the rest. The idea is to save time, to save money, to mitigate the risks associated with managing taxes internally and doing them manually as well. 

 

Avalara - End-to-End Compliance

So centralized management with distributed enforcement. With our signature Avatar dashboard management console, Avatar is integrated with your accounting or ecommerce package in minutes. Fully enabled with the taxability, Nexus, reporting and filing profiles unique to your organization. From there, Avatax simply completes your sales tax function with no charge and change to your existing processes. From rate research and maintenance to reporting returns invisibly, instantly and accurately. So when you consider there are over 12,000 tax regions in North America and each of these regions have constantly changing rates and boundaries, it is simple to see why automation is vital to organizations of all sizes, but especially to small and mid-sized businesses, which have limited resources. We are also revolutionizing Sales Tax Compliance. We are the leaders in this industry. We are the creators of this industry and below are a list of the crazy accomplishments that we have been able to achieve. 

 

Avalara Is:

  • Chosen by tens of thousands of businesses globally
  • Trusted provider for 2 billion sales tax calculations annually
  • Processing hundreds of thousands of sales tax returns annually
  • Remitting billions in sales tax liability annually
  • Recommended by thousands of software application resellers, CPA's and business consultants
  • Certified Service Provider of Streamlined Sales Ta Project (SST)


A vision of ours for Avalara, we want to be involved in every transaction around the world and we're making strides to do that today. So let's sum it up: 

  • Sales tax is incredibly complicated, accuracy is key and outsourcing let's you get back to what's important, which is growing your business.  
  • Avalara takes the burden of manual sales tax compliance to an automated service.
  • Avatax is simple, easy to set up and painless to manage. 


Typical to how I describe our service and company to the customers and the clients we work with is that ten to fifteen years ago when Berge emerged as a payroll company, everyone was doing payroll in-house but as companies grow it's complex and there's a lot of time allocated to that. There just came a moment in time when it made sense to outsource for payroll and HR and that's where Avalara is today. Now it's making sense for businesses of all sizes to just take Sales Tax Compliance off their plate, let the experts handle it, it's going to give you peace of mind and you're going to know that it's been done right. 

 

So with that being said I really appreciate everyone joining us today. I'm going to open this up for some Q&A. Here's my contact information:

 

Matt Martin

919-627-9785

matthew.martin@avalara.com

 

Please contact me with any questions you might have. 

 

Q&A

Q: We are a business in Oregon. Obviously we don't charge sales tax. Who would be an expert that we could consult to determine if we have a Nexus outside of Oregon? In addition, if we do have a Nexus, would we only be responsible for taxes in that jurisdiction only? 

 

A: When we talk about Avalara being an end-to-end compliance company, we offer everything from professional services in which we would do Nexus studies, we would do registering, registration, deregistration, we even handle vda's - so if you were interested in comparing (it always comes down to pricing) rates, typically if you're working with a CPA or someone in a legal department that is charging by the hour, we've got some very cost effective pricing in terms of Nexus studies. This is where it gets complex, if you're establishing a presence in a particular state, most likely you're responsible for any orders that come from within that state, you have to collect the sales tax on the state level, local level, county level and any special jurisdiction levels as well. 

 

Q: This person may be an international business, his or her question is, if someone were to set up a U.S. office would you have a recommendation as to which state might be best in your experience?

 

A: Yes, I can recommend a few different states. If you voluntarily register in the SST States and were to use Avalara, because we have a partnership with those states, then we would register you in those states for free and we would collect the sales tax and file the returns for you for free as well. If you want to email me that question, I'll give you a list of 3-5 states where an office in the U.S. would make a whole lot of sense because there's no sales tax there. 

 

Q: How does the pricing work? 

 

A: Our pricing model is fantastic because it's consumption based as well as it's really scalable. On a day-to-day basis I'm working from start up companies where we're just getting started all the way up to small businesses, medium sized businesses and large enterprise level customers as well. It ranges, we've got plans that start anywhere from $78 for the year, to $103 for the year and it goes on up from there. Consumption base really depends on how many online transactions that you are taking or how many invoices you're generating. The great thing about that is if you only have Nexus in California, let's say maybe you have 100,000 in transactions for invoices a year. So let's say $20,000 of those invoices are coming from the state where you have Nexus, which is California, we're only going to charge you for those transactions out of where you have Nexus, if that makes sense. Again, we've got some really great starting programs to get you towards the next step of compliance. 

 

Q: If someone wanted to learn more about the breakdown of costs for just the sales tax tracking through their Miva orders, where could they go for that? 

 

A: Because I'm the Miva Partner Manager feel free to give me a shout or send me an email and we can jump on a call and we can go through all that. 

 

Q: Who installs this software and how long does it take to actually get up and running?

 

A: The fantastic thing about our partnership with Miva and the integration that we have is it only takes a matter of minutes to get everything up and running. Depending on how complex your tax situation is, it could take a couple days but typically you see people up and running within one hour to three hours. We also work with a company called Argentic Consulting. They handle the complete integration process. So our customers don't have to worry about following instructions, plugging in the connector, etc. We're going to take care of the implementation entirely for you as well as you would have a go live coordinator and they would help you get started on your end as well as you would be assigned an account executive as well to answer any additional questions. 

 

Q: If attending a trade show, how long or for what do I have to charge sales tax in that state? 

 

A: It varies from state to state. If you want to send me over what state you're doing trade shows in, I can let you know the different thresholds. So if someone does a trade show they are required to have a Nexus for a finite amount of time. That's what's great about Avalara and the Avatax dashboard where if you were going to New York for a trade show, you could come into your dashboard and you could actually set the dates of when you want our solution to calculate the sales tax for New York so that you're sure you're collecting the sales tax and then we're going to be able to remit that to the state for you on your behalf. But again, each state is completely different. So some states are "if you're at the trade show you're fine." "If you're selling prior to the trade shows you're not." Other states is if you're making over a certain amount of sales you're going to have to collect sales tax, so again, it varies state by state. 

 

 

 

 






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