The best kind of software is one that just takes care of everything for you. You sign up for an account, pay them some money, and it takes care of business.
So when apps like Shopify, Avalara, and Quickbooks promise to sort your sales tax for you, it sounds too good to be true.
(Spoiler: it is!)
You only get the benefits they promise under unrealistically perfect conditions. If you don’t know how to conjure up these perfect conditions, you’re in trouble.
They throw you out of a plane with a bag of components, and expect you to be able to assemble the parachute yourself. While invoicing you for that parachute.
This is especially problematic at the returns filing stage, where they boast about automatic return filing, but can’t guarantee that what they’re filing is actually correct.
In this blog, we’re going to run through the pitfalls of putting too much trust in tools like Avalara, Shopify, and Quickbooks, and walk you through the things you can do to get the best results.
Calculating sales tax is far from simple
As a seller, the heading above won’t be particularly shocking. Sales tax often feels like an impossible puzzle, full of twists, turns, trap doors, and the occasional tumbling boulder.
This puzzle starts as soon as you start selling, because you need to be collecting the correct amount of tax for the correct products, which throws you headfirst into the wild world of taxability and nexus.
- Taxability: This is about how a state sees the product, and whether or not that product should be taxed.
- Nexus: Then there's the sales tax nexus, which is essentially the criteria that triggers the obligation to collect and remit sales tax in a certain state.
The problem is that tools (such as Avalara, Quickbooks, and Shopify) can’t understand the nuances and complexities of taxability or nexus across different states.
Some tools, like Shopify, will offer suggested product categories (which drives how tax is or is not collected in Shopify Tax), but these suggestions are often generated by AI, and can’t be relied on as accurate.
(Our experience is that these suggestions are way off, so don’t put too much stock in them)
We’ve had clients come to us where they’ve not known what to select, so the product doesn’t get categorized. To be safe, the software interprets these products as being fully taxable, but this means you could be collecting more tax from customers than you need to be.
Then you’ve got the returns…
All three of the tools we’ve mentioned provide automated filing functionality, which sounds amazing. But this only benefits you if you’re 100% sure everything is set up and entered correctly.
These tools assume everything is correct, so they generate and file your returns based on whatever data there is.
It’s all on you — if anything is entered or configured wrong, your returns will be wrong.
A common situation we’ve seen is a client thinks everything is hunky-dory, until they get notified that there’s a problem. They've been filing zero sales and zero remittance, or they’ve not been charging tax on a taxable product, etc.
To fix this, we can go in and amend all of the returns filed incorrectly by their software provider. But that can also come with its own issues, because the act of amending returns can also often trigger additional unwanted scrutiny by the state.
Multiple sales channels
If you’re selling products through multiple sales channels, this adds an extra layer of complexity.
New clients come to us who sell through both Shopify and Amazon Marketplace, and have been using Avalara for their returns. But they only have Shopify sales linked to their Avalara, and not the Amazon sales.
They assume this is fine because the marketplace sales are being calculated, collected, and remitted by Amazon.
This might not affect your liability, but it could impact where you qualify for nexus. So if your returns tool doesn’t have this information, it can’t give you accurate nexus recommendations. Additionally, some states actually require you to include your marketplace sales in your returns, so there’s a chance you’re not filing returns accurately either.
Note: Some states make you include retail, wholesale, and marketplace transactions, whereas others only care about retail transactions. So make sure to check on a state-by-state basis.
How to get the best out of your tax tools
There’s nothing fundamentally wrong with the tax tools in Shopify, Quickbooks, or Avalara.
The problem is that sales tax is extremely complex. So—in most cases—they’re not enough by themselves unless set up by an expert who understands the potential issues and pitfalls.
There are a few things you can do to give yourself the best chance of getting what you want from these tools.
You might be fine with the tool you’re using
Although there are risks to using software like those mentioned above, we also know that there are some smaller companies this software could be enough for.
These are companies that:
- Only sell on one platform
- Have a small number of products
- Have straight forward (or all taxable) products
If you tick all three of these boxes, you’re probably fine. As long as you put the work in to get it set up correctly, you’re in a decent place.
But no sales tax software is ‘set it and forget it’ — you still need to constantly check and review the software to make sure you have long-term accuracy.
Do your homework
From our experience at TaxValet, the companies that have the fewest problems are the ones who take the time to learn the basics of how sales tax works. But we also understand - better than most - that this can be a hefty undertaking.
You don’t need to become a sales tax expert (that’s our thing), but you should do your due diligence to understand how the software works and what it needs to run smoothly and correctly.
Do you remember my analogy earlier about being thrown out of a plane and having to assemble your own parachute? Doing your homework is like getting to peruse the instruction manual before you get pushed out the door. You might not have all the answers, but it’s waaay better than the alternative.
Call in the experts
The reality is that it takes a whole team of experts to understand and keep up with the demands of US sales tax. You’ve got a business to run, and can’t spend all your time learning about taxability, and keeping up with the changes across different states.
Luckily, you don’t have to!
There are people who dedicate their days to learning this stuff, keeping on top of changes and developments across the country. And we should know — we are those people.
TaxValet provides a done-for-you sales tax management service that takes sales tax off your plate completely.
- Tax settings configuration: We set up and maintain accurate tax settings across all sales channels, making sure you collect the right tax.
- Nexus and taxability review: We conduct thorough analyses of your business to identify nexus obligations and help you determine the correct taxability of products or services.
- Issue resolution: We identify and rectify your existing sales tax setup issues, helping you avoid substantial financial losses and audit risks.
- Audit management: We handle the entire audit process for you (if you face one), giving you full representation and a 360-degree audit-protection guarantee.
- Data verification: The TaxValet team meticulously verifies all your data to ensure accuracy and compliance.
- Ongoing compliance monitoring: We proactively monitor the ever-changing sales tax laws and help maintain compliance across all 50 states.
We don’t just help you with your sales tax, we become your sales tax team, providing specialized advice and expertise for any and all sales tax matters. Whenever you need it.
Need help working out the sales tax for your company? Book a free consultation to see how TaxValet can step in as your fractional sales tax team.