Tax compliance and the ERP system

Commerce has changed drastically in the last decade. More consumers are going online to research and make purchases and manage their finances and personal affairs such as their medical care. This culture shift has created need for legislative controls such as: Sarbanes-Oxley Act (SOX), Health Insurance Portability & Accountability Act (HIPAA), Control Objectives for Information & Related Technology (COBIT) and the Marketplace Fairness Act (MFA).

On June 21, 2018, the Supreme Court of the United States ruled in favor of the state in South Dakota v. Wayfair, Inc. The decision overruled a longstanding physical presence rule, allowing states to require remote sellers to collect and remit sales tax.

Since Wayfair, most (but not all) states have adopted new rules defining what establishes a sales and use tax obligation, known as nexus. Unfortunately for businesses, no two state sales tax nexus laws are alike.

All of these compliance measures address how business information is processed and reported, for example, how patient data is protected or whether sales tax should be charged for online purchases. A properly deployed ERP system has the capability to handle compliance with a high degree of accuracy and reliability. ERP systems also offer flexibility to add functionality as your business grows. For example, if you engage in a supply chain, you might choose to add modules for warehouse inventory, distribution, order processing and point of sale.

Transactional tax compliance is a critical piece in each of these business areas. Yet, while tax compliance is a key objective of the ERP system, tax compliance is often overlooked during implementation. This is primarily due to companies not fully realizing the impact ERP tax compliance tools can have on the business and underestimating their value.

Many ERP systems still rely on legacy processes (which tend to be manual) to manage transactional tax even though they have the ability to automate tax compliance via out-of-the-box integrations. If you don’t add automation capability to your ERP system, calculating sales tax basically requires you to upload rate tables, enter and track sales tax schedules in each applicable city, county, and state as well as rules, rates, and boundary changes.

Furthermore, address validation functionality is typically limited to ZIP codes. Basing sales tax rates and rules on ZIP can produce inaccurate results and thus waste time — it's often necessary to track down correct addresses, contact information, and charges from carriers for undeliverable items.

Any Accounting Manager or Controller will quickly agree that this manual sales tax management process is difficult, especially when your company:

• Does business in multiple states or jurisdictions (or more than one country)
• Buys, sells, or resells multiple products or services that could be taxable at more than one rate
• Engages in a supply chain that requires the collection of sales tax, use tax, and exemption certificates

It’s not just complexity that makes this practice flawed. Sales and use tax rates and rules are constantly changing at local, state, and federal levels, which means that if you manage compliance manually, your staff will spend inordinate amounts of time researching rates and updating tax tables. With more than 12,000 taxing jurisdictions and 100,000 tax rates, it’s nearly impossible to ensure the right tax is calculated and collected every time.

Take, for example, the sales order and invoice entry process. In the standard ERP set up, you're required to choose the tax tables to apply to a transaction. If you don’t know how tax should be applied, the risk of choosing an incorrect tax rate is high. Yet you need to be accurate because the tax authorities hold you responsible.

The truth is, if you're attempting to handle sales and use tax compliance manually, you're expending valuable time, energy, and money on activities that don't generate revenue. At the same time, you expose the business to unnecessary audit risk.