Digital transformation and tax compliance: Why tax automation is so critical now

Even before the pandemic, enterprise leaders across the globe were readying their businesses for digital transformation. COVID-19 accelerated timelines, forcing businesses to shift their road maps to be fully up and running with digital platforms and channels. “If companies thought the world was moving fast before the COVID-19 crisis, they need to be prepared for the warp speed of change ahead,” says Bill Kanarick, a leader in digital transformation as global consulting chief for EY.

The consensus among experts is that digital transformation has to happen for recovery to happen. As IDC Analyst Danielle Hernandez tells Forbes, “Now is the time for digital transformation to shine, helping organizations multiply the value they produce with automation, intelligence, and connectivity because that’s what is key to a faster economic recovery.” Forrester Research Analyst Charles Betz agrees, “The world is going even more digital because of this crisis, and old industrial-era thinking needs to be abandoned once and for all.”

This message is being driven home hard as companies pivot to new ways of doing business, be it remote and essential-only workforces, no-touch processes, surges in ecommerce, new business models and delivery channels, or other challenges. “Any company at the moment that isn’t looking at how it can improve its processes by using the cloud or other digital services is going to be left behind,” says CNBC Anchor Geoff Cutmore.

Cloud platforms and applications are particularly well-suited to global indirect taxes (sales and use, VAT, GST) given their complexity and dynamic nature. Recent changes to U.S. sales tax governance, particularly economic nexus, have accelerated the need for more real-time, reliable compliance solutions, as have digital tax initiatives in the U.K., India, and other major markets, as well as major VAT and customs overhauls in the EU, and e-invoicing rules introduced in many countries. “Tax compliance is integral to the transformations taking place in commerce on a global scale,” says Avalara Chief Executive Officer Scott McFarlane.

In IDC’s Worldwide SaaS and Cloud-Enabled Sales Tax and VAT Automation Applications Vendor Assessment, Senior Research Analyst Kevin Permenter says, “The speed of digital business coupled with the growing volume and variety of sales transactions has added an unprecedented amount of complexity to sales tax compliance. This complexity has created a wave of interest in sales and use tax automation software.”

McFarlane concurs, “The global market for automated tax compliance services is huge … as the global economy reopens, we continue to benefit from several tailwinds supporting adoption of these services, such as the generational shift to omnichannel commerce and cloud-based solutions along with growing emphasis on efficiency and the ever-greater regulatory scrutiny and penalties for noncompliance.”

This comparison chart (Chart 1) helps to understand the differences in how cloud-based versus on-premises solutions handle tax compliance:

In the past, enterprises were often reluctant to move from on-premises to cloud-based solutions due to fear of encountering issues with security or platform compatibility. Systems integration can be a big undertaking and no company wants to risk disrupting operations or losing data in a migration. Cloud technologies have come a long way in a short time and these uncertainties are no longer barriers to adoption. Today, the impetus is to find solution partners that meet your business needs and set you up for future growth.

Avalara sees value in partnering with platform providers to ensure customers experience seamless integration of tax automation in their ERP, ecommerce, shopping cart, point of sale, and billing systems — plus API capability. It’s a distinction that IDC says gives Avalara an edge. “Avalara has been aggressive about building out its ecosystem to include key players within the enterprise resource planning, accounting, digital commerce, point of sale, and customer relationship management markets.”

When choosing a tax compliance solution, integration is key. It’s important to understand if a solution is truly cloud-native and built to fully enable the cloud capabilities in your ERP or if it’s a retrofit, on-premises solution.

Non-cloud-native solutions often lack critical compliance functions such as:

• Returns integration
• Parent taxpayer or parent-level configuration
• Data extraction, user-defined rules, and accessible systems settings
• Custom reporting
• Exemption certificate management, email communications, and reporting
• Real-time log access

You should also consider the maturity of the solution, its capabilities across all areas of tax compliance, and its fit with your business needs as you grow.

To be considered market leaders, IDC-evaluated vendors had to possess core tax automation functionality including tax calculation/determination, exemption certificate management, returns management, and reporting capabilities. Solutions were also rated based on the following criteria:

• Innovation
• Delivery
• Functionality
• Growth
• Cloud strategy
• Architecture (including API and integrations)

Avalara was one of only two vendors to land squarely in the Leaders category and is the only one that has extensive partnerships with leading ERP and ecommerce system providers to provide seamless integration with technology platforms.

Avalara’s global tax compliance cloud can directly tackle the events, or triggers, growing businesses experience that can lead to new or expanded tax obligations. Because of this key strength, IDC recommends companies “consider Avalara when your business is growing and encountering indirect tax management challenges, such as navigating regulatory change, beginning an omnichannel ecommerce strategy, facing new product expansion, or selling in new geographic areas.”

A survey of Avalara customers conducted in 2019 by customer insights firm TechValidate found the biggest driver for companies to automate tax compliance is the need to improve accuracy of tax calculation. This is followed closely by a desire to reduce compliance risk and time spent managing returns. Additional incentives included reducing strain on IT resources, better storage and tracking of exemption certificates, and reduced costs of tax management.

“Avalara is extremely user friendly and makes tax compliance much simpler,” acknowledges one survey respondent who manages tax for a global provider of assessment and measurement software. “This is most definitely a better solution than filing your own returns, especially when dealing with multiple jurisdictions. We now have more time to spend on other projects to keep our company growing.”

This same survey found that prior to selecting Avalara as their cloud provider for tax compliance, 60% of these companies were still handling tax without an automated solution. The rest were relying on on-premises-based or internally built solutions. These proved woefully inadequate, with survey respondents citing problems keeping up with tax laws and jurisdictions, inaccurate tax calculations, difficulty managing exemption certificates, and lack of integration with existing systems as major issues with non-native cloud tax solutions (see Chart 2).

For some survey respondents, managing tax in the cloud was a resource-conscious decision. “It’s allowed us to maintain a very lean finance department staff,” says Renae Bathke with Arkray USA, Inc. “We have the peace of mind that Avalara is properly calculating tax, as well as properly filing our returns, and ensures we are housing our exemption certificates in the most economical and efficient way possible.”

Survey results showed that companies felt more confident using Avalara for accuracy of both tax calculation and reporting, among a host of other improvements (see Chart 3). Businesses also reported being better equipped to deal with nexus, manage new tax obligations, and pass an audit.

“Avalara takes the hard work out of an incredibly difficult responsibility companies face, which is sales tax compliance,” says Tom Berkompas, chief financial officer for US Digital, a manufacturer of motion control products. “Not having to worry about rate changes and whether tax has been applied properly on invoices makes the prospect of an audit far less daunting than it otherwise might be.”

Newly established nexus standards in the U.S. are proving problematic for most companies, but especially for industries like manufacturing or distribution that haven’t traditionally been tasked with taxing transactions. The adoption of economic nexus following the 2018 Supreme Court ruling on South Dakota v. Wayfair, Inc., and low compliance thresholds have made these companies more vulnerable to audit risk.

Without tax software like Avalara that automates to account for changes in tax liability, these businesses are far more likely to overlook new obligations in jurisdictions where they’re now required to register to collect and remit tax or report nonexempt sales. Furthermore, validating exemption certificates in all these jurisdictions can be overwhelming and a drain on resources.

Conversely, Avalara customers feel better equipped to deal with the business changes and growth-related activities that trigger new tax obligations, particularly when a company is required to register to collect and remit sales tax in additional jurisdictions (see Chart 4).

“After the Wayfair Supreme Court decision, we have economic nexus in many new states,” acknowledges the IT manager for a wholesale and distribution company. “With Avalara, our compliance team will be able to keep pace with charging sales tax and filing to these new jurisdictions.”

Charles Darwin said, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

Embracing change and prioritizing the move of critical functions to the cloud now puts your company in the best position to act on opportunities that benefit your business, employees, and customers moving forward.

COVID-19 has proven the necessity of technology in keeping companies productive, connected, and operational. It’s also driven home the urgency to realize efficiencies in your business anywhere and everywhere possible. Tax compliance is a natural fit for this digital transformation. Avalara’s cloud tax compliance solutions expediently and cost-effectively replace resource-intensive manual tasks and on-premises systems, saving you time and money, and reducing risk. Pre-certified integrations into your business platforms and applications makes enabling tax automation a seamless and headache-free experience.

Avalara’s vast product suite allows you to customize a tax automation solution to your business needs. Our global compliance solutions address U.S. sales and use tax calculation, returns filing, and exemption certificate management; consumer use tax self-assessment; VAT and GST; cross-border customs duty and excise tax; product taxability and item classification; business licensing and registration; as well as industry-specific compliance requirements for beverage alcohol; lodging and hospitality; fuel and energy; and communications.

Contact Avalara to learn more or talk to your solution provider about adding Avalara indirect tax compliance software to your ERP or ecommerce platform.