3 Tips to Turn Your ERP into a Tax Survival Tool
Imagine you’ve just received notice that you’re being audited for sales tax compliance in just three days. You frantically call your accountant and ask them to start organizing the past 12 months of sales. Your company has never been audited before, but you believe you accurately record all sales and assigned rates, have always filed and remitted on time. You keep all of your exemption certificates in a filing cabinet in the back room and have a master spreadsheet of all the rates, rules and boundary changes as they occur where your business is based. You sell online now and again, but nothing significant and all to customers just over the state line. You consider your business more or less protected. And while you don’t literally have insurance against errors, you do feel assured that your bookkeeper’s records are good enough.
Following the audit, you're totally surprised when you see a proposed fine of $30,000 for missing exemption certificates, and undercharged sales tax rates. Cold sweat on your brow? Breathing shallow and fast?
Sales tax impacts just about everything: digital goods, materials, dog food, and even services in some states. It’s collected most everywhere in the country–except for that handful of outlier tax-free states. And it’s surprising. Just when you thought you knew what your state was up to, it up and changes its tax laws.
Not worried about sales tax? Have it handled? Good for you and fingers crossed that your strategies are sound. For everyone else, some handy tips to turn our ERP system into a tax compliance survival tool might helpful:
Tip 1: Don’t trust ZIP codes
A frightening number of businesses have rate tables in their ERP system with rates based on ZIP codes. This method can give you inaccurate rates, landing you in trouble with customers and states. Here’s why:
The U.S. Postal Service developed Zone Improvement Plan (ZIP) codes in the 1960s, so mail could be delivered more efficiently. What many people don’t know is that these “zones” can not only overlap each other, they can be adjusted and, sometimes, they might not represent a geographic region at all. In any given year, the USPS makes numerous boundary changes to ZIP code areas, making them an unstable data source. Most importantly, tax jurisdictions do NOT correspond with ZIP code regions. That means basing sales tax rates on a ZIP code risks applying not only an incorrect sales tax rate, but remitting it to the incorrect jurisdiction. This can increase your company’s risk of audit and result in penalties, fines, and fees.
Using geolocation technology to find the right sales tax rate, on the other hand, now that’s a different story.
Tip 2: Don’t assume anything
Think because you’re not a retailer you don’t have a sales tax obligation? Think again. Often, companies that don’t collect and remit sales tax actually have much more rigorous rules to follow for compliance. And when it comes to pleading your case to the state auditor, ignorance isn’t bliss.
Here’s the thing: What’s taxable, where, and how is changing at rapid pace. Things like services, materials, and digital goods that weren’t taxable before, are now taxable. So assuming you don’t owe is dangerous. A smarter strategy is to use state of the art technology that’s already approved for your ERP system to do the determination for you.
Tip 3: Pay late, seal your fate
Even companies that work hard to accurately track and update changes in sales and use tax rules, boundaries, and rate changes often fail to remit their liability correctly. Knowing which form to use, where to file, and what to include in your returns, can be an onerous task – especially when you do it manually.
You can make it easy and ensure accuracy by using a returns filing service. You pay one time, they take care of where the money goes.