There is a common misconception that a third-party tax engine is essential for any business trading in or with the US.
The truth is that there are different ways to manage the complexities and nuances of the country’s tax system. Indeed, we have completed many projects with clients operating in the US that involved implementing Oracle’s eBTax solution to meet tax requirements.
Every business is different and the solution that fits one organisation may not be right for another. Before considering how technology can deliver accuracy, efficiency and compliance in every tax transaction, I’d encourage you to look at the demands of US tax on your business from three perspectives.
1) Tax on sales
With sales, it all comes down to what you are selling and to whom. For tax on sales, the main factor that hampers eBTax is geography; eBTax with a rates file goes down to the ZIP code level but there are cases where a ZIP code could have four different tax rates.
Third-party tax engine providers will home in on this point and try to exaggerate it because, admittedly, it is possible to have three houses in a row with the one in the middle in X county and therefore on one tax rate, while the houses each side are on a slightly different tax rate because they are in Y county.
But these cases are rare. In any case, we have created a rates file that allows a user to select the correct address for a customer, providing businesses with that door-to-door rate accuracy that can be important in certain instances.
The next thing to consider is who you are selling to. In the US, areas are typically categorised as residential, commercial, industrial etc., so if you are selling B2C the number of chances that the location you are selling to has multiple rates in the ZIP code is reduced because all of the commercial units in that ZIP are likely to be in one county and therefore apply one rate.
Unlike with VAT where the seller is responsible for the rates, if a seller makes a mistake on their sales tax and they charge 7% when it should be 8%, the customer is responsible for the extra 1% in Use tax.
Finally, you need to consider what you are selling. Many of the clients we work with either sell B2C only and their customers have exemption certificates so no tax is needed or they sell services, of which the majority are also exempted in most US states. Unless you are shipping goods, most sales are likely to be exempt.
If the majority of what you sell does not require tax, why invest in and maintain an expensive tax engine? We can quickly, easily and affordably help you manage the exceptions in Oracle.
To summarise, if you sell B2C in high volume and fall under one of the complex minimum or maximum based rules in place in the US, a tax engine is likely the best way forward. However, if you sell B2B and only a small portion of sales are liable for tax, eBTax should be considered. It will also pay to acquire a solution that manages Use tax as well as sales tax. Not every system on the market does a great job of that!
2) Tax on purchases
At Innovate, our solution typically provides maximum value for our US customers when it comes to purchasing.
Unlike a company’s sales which are predominantly services, intended use leads to exemption of a specific product it produces that is classified in the same way as a service for tax and so exempted. The business will purchase both goods and services and even if it has an exemption for purchases of, for example, computer monitors because it resells them, if they use the same monitor in their own office then it becomes taxable.
One of the key differences for purchases is that sales tax is based on the customer location, so in AP we know all the locations and therefore the relevant tax rate. For example, if a business makes 100 sales to 100 different customers it may need 100 different rates. But if it makes 100 purchases from 100 different suppliers, they could all charge one rate.
There is also a requirement to determine Use tax in the US. This works in a similar way to the reverse charge mechanism for VAT where if a supplier does not have a tax registration in the state you are in (NEXUS), it doesn’t charge any tax and you (as the customer) are responsible for it.
That’s why our solution provides our US clients with everything from the ability to manually choose whether the tax is exempt or Use tax (as the rate provided by the customer will always be the same if they are charging) up to comprehensive automation around purchasing categories, supplier types etc.
This means we can automate the exemption of purchases based on the purchasing category for a tax category of, for example, ‘Services|Janitorial Services’ and set what states these exemptions are applicable to.
Oracle only offers basic tax reporting for the US, but our enhanced reporting functionality works just as effectively for the US as it does for VAT in Europe.
Third-party tax engine considerations
The leading tax engine providers offer very good technology, but of course this comes at a hefty price and often with a promise that you will not need to do anything once their system is installed. Unfortunately, this is simply not true.
The key to third-party tax engines is how the data is mapped to the tax engine from the source systems; and we have seen this done very badly, resulting in lots of issues around the tax which can be avoided with proper planning.
Even after you have mapped your purchasing categories and sales items, for example, you still need to know when a new tax category comes into play or when to introduce a new service.
The tax engine will keep those items updated so if Widget X is exempt and then becomes taxable in California the tax engine will manage this.
But if California subdivides Widget X so now it has three sub divisions of ‘Widget X – canned’, ‘Widget X – bespoke’ and ‘Widget X – hosted’, with all exempt except for the bespoke version you still have to update your system to check if these changes apply to you, decide if new purchasing or sales item categories is now required and remap these items.
We have implemented tax engines on behalf of many clients of all sizes and across multiple industries. If you are considering investing in a third-party tax engine, working with a specialist like Innovate guarantees the project will run successfully and meet your objectives. Why not read more about how we achieved exactly that for Snowflake during its recent implementation of a new ERP and Vertex tax engine?
For bespoke advice on how we can identify and implement the solutions to help your business meet its objectives, get in touch with us today.