Whether your business is looking to expand into more states (or countries), adding e-commerce options or exploring any number of other digital needs, integrating a tax engine with your ERP can be essential to ensuring positive growth. Organizations can see reduced maintenance costs and lessen the burden on internal teams, while also experiencing increased accuracy in filing taxes and a smaller audit risk.
If your company is implementing a new ERP, then it is especially important to consider a tax engine because you’ll need more than the native rates and or capabilities in the ERP. Essentially, leveraging a tax engine can accelerate the digital transformation of financial core applications by removing the manual processes associated with tax compliance. This allows your team to focus on other strategic initiatives and take your company to the next level.
Let’s explore a few key areas impacted by using native rates/functionality of an ERP versus having a tax engine in place.
Key benefits of integrating a tax engine with your ERP
Tax rate maintenance
Using the functionality of an ERP when it comes to compliance means the burden of knowing and understanding all the jurisdictions and their rates is on you. There are currently 12,000+ jurisdictions within the U.S. alone, and they change frequently. This means that it is your responsibility to do constant research and vigilant maintenance of those rates. Some states, such as Colorado, will even have state, county and district levels of tax rates.
Additionally, you need to ensure the correct association of customer locations to taxing jurisdictions. Many ERPs use zip codes to identify the tax rate, but zip codes are not the most accurate way of identifying the rate and can cause incorrect taxation. Having a tax engine can help your company maintain accurate and reliable tax rates, without putting undue burden on your employees to keep pace with those changes.
Product and service-specific taxability
Product and service-specific taxability can be quite nuanced and can be taxed differently by location. Usually within an ERP, you have a way to make something taxable or exempt across the board. However, it’s not always so simple. A few examples:
Clothing can be taxed at a standard rate in some locations, but tax-exempt in other jurisdictions.
Shipping cost is subject to tax while also being dependent on items being shipped.
Software may be taxed at the standard rate, at the exempt rate or it can be taxed at a special reduced rate.
Managing taxability in an ERP can be complicated because it creates limitations and doesn’t take into account taxability by location, special or reduced rates by location, and does not take into account thresholds or fees. It can quickly become too complex to stay accurate and compliant.
Customer taxability
An ERP by itself also creates limitations for customer taxability. You can maintain customer lists within an ERP (mark if exempt, etc). However, you may have different exemption types per customer, which could affect taxability differently.
Jurisdiction could also impact tax differently. The same exemption type may be taxed, exempt or partially exempt, depending on the jurisdiction. Furthermore, an ERP can mark “exempt” or “not exempt,” but it cannot handle the intricate details. ERPs also do not inherently have the ability to store images of exemptions to prove the validity.
If you are not current with your rate changes, you will be incorrectly charging and collecting sales and use tax. There could also be product and service exemptions, or even customer exemptions, that go unaccounted for. This leads to increased audit risk and exposure and dissatisfied customers. If your customers are charged the wrong rate, it is just more time spent having to fix the error.
The bottom line is, your business cannot afford to have an out-of-date system. If IT cannot update tax software on a regular maintenance schedule, all areas of the company feel the ramifications. Some updates can take up to several hours to implement, test and put online. Tax changes are ever-evolving and cannot always be predicted.
Integrating a tax engine with your ERP will help your business stay current with rate changes and keep customers happy. Working with an experienced sales tax professional can ensure that the integration is as smooth as possible.
