Sales Tax Automation Software: Why It's Not Enough for Comprehensive Compliance

We had a client reach out because they knew something was off about their sales tax, but they didn't know what.

They'd tried reaching out to the company that made their sales tax software, but every time they were given the runaround.

So they asked us to take a look, and we started walking through their numbers.

And we found something MASSIVE.

We realized that there was an issue with how their sales data had been passed between their checkout software and their tax software

The result was that they were paying tax for transactions they hadn't collected tax for.

This issue was going to cost them $910k per year!

But this isn't an isolated incident. Every time we onboard a client we find setup issues, tax setting issues, nexus issues, and so much more.

Which is the problem with expecting software to solve all of your sales tax problems — it just can't.

As good as the software is (or claims to be), it's just not a problem that can be automated to that level. And in this article, I'll explain exactly why.

In case you want to jump ahead, here are the sections I'm going to cover:

• The Basics of Sales Tax Automation Software
• Limitations of Automation in Sales Tax Compliance
• The Importance of Human Oversight
• Integrating Software with Expertise
• Case Study: When Automation Falls Short

By the end of this post, you should understand the limitations of sales tax automation software, and what you can do to get the most out of it.

The Basics of Sales Tax Automation Software

There are two different types of sales tax automation software you're likely to use — tax calculation and filing engine.

Tax calculation tools give you an automated way to look up the sales tax at the time of sale. It should tell you if it's taxable and how much tax to charge the customer at checkout/invoice, etc.

Basically, you need to be confident you're collecting the right amount of sales tax, which is where tax calculation tools become vital.

If you're lucky, depending on the sales channel you use, there might already be a pretty good tax calculation embedded in that.

For example, Shopify now has Shopify Tax and will let you set up the product categories for what you're selling. It's pretty darn good, and you get it as part of Shopify.

But if you're selling on a platform like BigCommerce — or you have your own custom website where it's all hard coded — more often than not you're going to need a third party tax calculation engine.

When you're looking at these, you'll need to figure out if they work for the products you're selling. is it going to integrate with the sales channels that you sell on, will it work with how transactions are flowing between your systems, etc.

The second type you'll need is a filing engine.

Nowadays, it's very unlikely that anybody is sitting down and doing returns manually on an ongoing basis. That's because it's just too much to do manually — preparing the returns and determining how much tax is due in each jurisdiction. 

For example, if you're selling a lot in Texas, you could have to file a return with 300 or 400 different line items just to pay a few cents to one county, and a few cents to another special jurisdiction, etc. Submitting a single sales tax return can take a half-dozen hours (or more)!

It's just not viable to do this manually, so you'll use a filing engine to do it for you.

It calculates the tax, and adds up how much was collected from sales. Then it works out how to prepare it on the return and submit it.

But not every filing engine works the same way. You should be looking at what the software is actually going to do.

Is it just going to prepare the return for you and then you need to manually print it out, write a check, then mail it in? Will you have to manually enter all the information online? Is it actually going to handle the entire process for you?

You also need to check that it can actually handle all the returns you need. For example, if you're selling it to California, there's an E-waste return if you sell anything with batteries or screens. And there's an additional return for many states if you sell rubber tires

And most software is not going to handle these more complex returns.

If you're just selling pretty standard stuff, then it's probably going to work fine. But if you have any level of complexity at all, you'll need to find a sales tax filing engine that can create these and manage them in bulk.

Limitations of Automation in Sales Tax Compliance

Most people assume that when they purchase sales tax software, all of their problems are going to go away.

Which is actually fair to assume, because this is what these software companies promise on their website and sales material.

But the reality is it doesn't happen that way. It's just a tool. And you need to figure out how to use the tool effectively to get the benefits. But most of the time you won't realize this until mud hits the fan.

Maybe you get a letter in the mail, you get audited, or there's some tax calculation issue.

These tools are great at handling the calculations or filing. But really that's only a small part of sales tax. You've still got strategy, planning, audits, and dealing with the Department of Revenue to worry about. And that’s just scratching the surface of what these tools can’t handle. Sales tax software simply can't help you with any of these things. 

Plus, most of these automation tools are really only “automated” if they work perfectly with your setup. In our experience, that’s usually only the case for small, simple businesses.

That's why, unless you have extremely specialized training and expertise in sales tax, no tool is going to be sufficient for you to comfortably put your sales tax to bed.

It's just like using an accounting tool like QuickBooks or Xero. It's not enough to just use the software. You also need an accountant, or even an entire accounting team.

The Nexus Problem

Another key part of working out your sales tax is understanding where your business has sales tax nexus

Sometimes these tools will boast about having economic nexus calculators built in, but they're never accurate. By and large, they just look at total sales, which ignores key variables like exemptions, state definitions, physical presence, and other criteria.

This approach can create false positives and false negatives. So you could be missing certain states while including states that you don't actually need.

The Importance of Human Oversight

As I mentioned in the intro, companies come to us all the time with issues that could have been avoided if their sales tax processes had proper oversight.

Clients that have been audited, and instead of expertly presenting only the information they needed to provide, have essentially just handed over the keys to their business records.

And by supplying information they're not legally obligated to provide they essentially handed the auditor a bunch of rope to hang them with.

That's because software is just a tool. Like a hammer doesn't know what it should or shouldn't hit, sales tax software doesn't know what the right and wrong data is.

It can't call Texas when there's an issue with a permit, or chase clarification on a return that got sent back.

At the end of the day, shit happens. And you need to have human oversight with sales tax expertise to help you jump the inevitable hurdles you run into.

Even month-to-month, you need to be cleaning up your data. You might need to spend up to fifteen hours a month manually prepping your data in the software so it's in the right shape for the software to do what it's supposed to do.

That's the stuff they don't tell you when you buy the software, because it ruins the rosy picture of the software magically doing everything for you. I know, because I used to work for sales tax software companies … that’s where the idea for TaxValet came from, after all!

Integrating Software with Expertise

After reading the post so far, you might think I'm not the biggest fan of sales tax software. But that's not actually the case.

There's nothing wrong with these tools. In fact, they can be hugely beneficial to companies of any size. My issue is when companies think these tools alone can solve their sales tax problems. 

The truth is that when combined with sales tax expertise, these tools become part of a really strong sales tax strategy.

When you're confident the data is right, and you have someone who understands the nuances of sales tax law, this software can make your life a lot easier, and even save you money.

But if you don't have the right strategy, and you didn't plan your sales tax from the beginning, you're going to end up with a huge, expensive, complicated mess that you're going to have to fix later on.

Case Study: When Automation Falls Short