What is Sales Tax Automation?

Once upon a time, everything in the tax world was done manually, on paper. Each and every line. 

Luckily, technology has changed all that and made it possible to automate many business functions, including sales tax. What once took tax professionals hours, now takes a matter of minutes, saving companies time and money. 

When you think about sales and use tax automation, the first thing that probably come to mind is software.  That’s because software is usually the main focus for most tax automation companies. They tell you about connectors, API’s (Application Programming Interfaces,) and other software terms. 

And, while connectors and API’s are important in making sure that software shares information, that’s only one part of tax automation.  The elephant in the room that’s often not spoken about is the need for accuracy.

Simply put, the main goal of any tax automation should be getting tax right on your company’s sales or purchases. If it’s not getting it right, then it’s not helping you save time and money. 

Tax automation needs both parts to work: 

1. Software Connections – two or more software programs must work together to share information

2. Software that gets tax right 

Getting tax right is much more challenging than software connections.

To get tax right, the focus needs to be on what happens inside the tax automation software –after it receives information from your company’s software.

To get tax right using sales tax automation –there must be a focus on these five elements: 

  1. physical locations
  2. accurate tax answers
  3. correct tax rates
  4. customer exemptions
  5. software

If any of these are missing or incomplete, your tax does not get done right.

Effective sales tax automation software should use these five factors to accurately calculate tax, and transparently provide reports for your company. 

This information is used to:

  • Accurately and timely file tax returns
  • Answer questions under audit
  • Verify that tax is done right

When searching for a tax automation provider, it’s important to find one that uses “boundary” information for tax rates instead of shipping location information.

Most sales tax automation providers use “geocodes” (made up locations), ZIP and ZIP+4 codes. While they can get close to an accurate physical location and associated tax rate, they were not created for correctly applying tax rates –they were created to facilitate shipping and delivering mail.

Your sales tax automation provider should also have a dedicated research team providing accurate tax answers that are maintained daily. Doing so avoids the scariest three words in tax automation: “User Defined Rules.”

These words mean that your tax automation is no longer automatic – it has become manual. You must manually research and update tax answers for “user defined rules”. They are “defined” by you (the “user”) and have to be researched and maintained by you.

So, in your search for a solution that will get your tax right every time, make sure your sales tax automation provider offers a complete solution, not just a software connection.