Once a company has decided to automate its sales tax functions, the approach for automation can take one of two paths. Much like belly buttons – you either have an Innie or an Outie.
The Innie – The simplest and most rudimentary approach would be to load rate tables into your billing or ERP system and set taxability flags on customer or material master records. This would be the internal approach since you are effectively building the tax functionality within your ERP.
The Outie – The more advanced approach would be to integrate your ERP system with specialized tax software -like those provided by ADP-Taxware, CCH, Sabrix, SpeedTax, and Vertex. This is the external approach because it means you are handling the bulk of your tax functionality in a system that is outside your ERP.
Typically an external system can be more complicated and costly to implement, but there are key benefits that justify the Outie approach. Here are a few that come to mind:
1) Researched Tax Decisions – wouldn’t it be nice to have a dedicated team of tax research folks handle your taxability decisions? Most external tax software providers deliver pre-researched tax decisions on item or service categories that you can map your SKUs to. This research is updated every month along with the rate updates. An internal approach usually means you research your own tax decisions.
2) Robustness – since the external systems are designed with complex requirements in mind, they are simply better equipped to handle the complications that baffle most non-tax people. I am thinking about manufacturing, R&D, services, oil & gas, medical devices and software to name a few areas of bafflement.
3) Registration Requirements – you may not be registered in every jurisdiction, so you will need to have a way to calculate zero tax in those jurisdictions. An internal approach may require some manipulation of the rate file or taxability settings on your customer records to handle this. External systems have specific features that let you manage your registration settings easily.
4) Rate Nuances – Determining if a sales tax, sellers use tax, origin or destination tax applies is based on a combination of the ship-to and ship-from locations (and sometimes where the order is accepted or originated). An internal rate table would not be able to distinguish these variables, but an external tax system offers this as standard functionality.
5) Returns – external tax systems also provide returns modules that allow you to automate through to your returns. This integration can save you significant time each month, especially if you have a high number of returns to prepare.
6) You’re In Good Company – the vast majority of Fortune 1000 companies have implemented (and upgraded) at least one of the major external tax systems over the last 15 years. With that, the rigorous testing and complex requirements brought to the table by these companies and their consultants have helped the tax software systems get better over time.
The way I look at it, it’s better to buy the fruit of somebody else’s labor than it is to grow your own.
So what about you ? Are you an Innie or Outie?