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Summary
Tax is probably the least transparent area of the finance function. In large companies, the tax department consists of people with deep subject-matter expertise toiling with the aid of spreadsheets. Midsize companies may engage third parties to handle some or all of this work. They do not get the same attention as income taxes, but sales and use taxes can be a significant part of a company’s tax burden, in terms both of the money involved and the time required to manage the process. Typically, companies have used spreadsheets to manage their calculations, record-keeping and reporting. Ventana Research believes that dedicated tax management software is a better tool, and it is available in a couple of forms. Large companies may wish to manage the software on their own premises, but both large and midsize companies can choose to approach it through software as a service (SaaS) hosted by a third party.

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Calculating and managing sales and use taxes is not rocket science, but neither is it as simple as one plus one. Companies doing business in North America must deal with thousands of tax authorities whose rules and rates are constantly changing. For companies operating within the European Union, the value-added tax (VAT) presents its own long list of complications (for example, the number of days spent on a business trip to another country will affect VAT liability). Moreover, there are variables that further complicate calculations, including which tax entities’ rules apply depending on the address of the seller and the buyer of an item, the type of good or service involved and whether the buyer or seller has specific exemptions or permits. Moreover, it is not always obvious to a company that it has a sales- or use-tax liability, which may arise because a third-party contractor from another state was involved in a transaction. This type of liability is likely to go unnoticed until there is a tax audit, which makes it more troublesome.

There are good reasons to automate dealing with sales and use taxes. One is the complexity of the rules and the need to stay on top of them. A second is the low value of each individual transaction but the high value of all transactions in aggregate. In other words, it is not always cost-effective to have people handle each calculation, but the aggregate value of the savings from more accurate tax calculations makes purchasing automation cost-effective. Companies that don’t have such automation often use a third-party service to keep them abreast of rates and rules, but they frequently have to research these references to do the calculations. A third reason is that a dedicated application addresses the fundamental shortcomings of trying to manage sales and use taxes in spreadsheets. Spreadsheets are inherently error-prone and difficult to audit completely, so using them poses ongoing risks of penalties and additional payments caused by underpaying taxes or the waste of overpaying taxes. A fourth reason is to save the time of people who could use it more productively.

Many large companies already have automated their sales- and use-tax processes with on-premises software. Small businesses, in contrast, typically have less complex business operations, and therefore handling sales and use taxes manually has not posed a heavy burden. Midsize companies (those with 100 to 1,000 employees) are caught in the middle. Many are large enough to have complexity and transaction workloads great enough to make automating the process worthwhile, but they do not have the IT infrastructure or staff to manage a dedicated application in-house. Ventana Research believes that sales and use taxes are an aspect of finance where SaaS may make sense for midsize companies. We advise these companies to consider SaaS alternatives, which can provide automation without requiring them to support the application. During evaluation, determine that vendors of this service can adapt their offering to the company’s specific tax situation without extensive (and expensive) customization. Likewise, ensure that the vendor’s hosting facilities have SAS 70 Type II certification (covering internal controls for security and availability) to address security concerns fully. Reliable vendors also should be able to provide customer references relevant to your business. In many ways, sales- and use-tax automation is like payroll automation – a nonstrategic Finance department activity for which the efficiencies gained by using third-party services offer an attractive alternative.

Assessment
There is growing list of finance processes for which advances in information technology have changed the rationale for using spreadsheets, particularly for midsize companies. Until recently, midsize organizations had few practical alternatives to using them, despite their shortcomings. However, the arrival of applications designed expressly to meet midsize companies’ constraints and budgets – SaaS offerings among them ¬– have introduced options. We advise companies with a need to automate the management and execution of sales and use taxes to look into these alternatives.