If you’ve worked in e-commerce for long, you may have come across the term sales tax automation. It sounds fancy and complicated, but it’s really just the idea of taking your sales tax collection, remittance, and filing procedures, and making it all happen automatically.
Exactly what is this sales tax process?
1. Determine the Sales Tax Rate
The first thing that needs to happen, while a customer is checking out on your website, is determining what tax rate should apply to each item being purchased.
At first glance this may sound simple.
But if you operate in multiple states, or in a state with destination-based sourcing and multiple tax rates, it can get complicated pretty quickly.
Did you know that two buildings across the street from each other can have two different tax rates? Even if they are in the same zip code?
The combined tax rate for a given location is usually a sum of multiple taxes. The state often (but not always) charges the largest percentage, but counties, cities, and other authorities (transit, shopping districts, etc) can have an additional sales tax rate that gets added to the state rate. The boundaries for each rate generally differ from each other.
So how do you figure out the rate for a given address?
This is where sales tax automation first comes into play. Our servers can determine all of that information in under a second, and return it to your website for calculation within your checkout process. The customer doesn’t even know you’re communicating with our systems.
Think about your shipping rate calculation and payment processing. In many cases, these processes contact other systems, such as UPS and FedEx for shipping, or Paypal or Authorize.net for payment processing. (Among many others.) It’s seamless, and the customer doesn’t leave your site. AccurateTax’s sales tax automation works the same way, only with sales tax.
2. Determine the Taxability of the Order
Even once you’ve pinpointed an address, the sales tax may not be straightforward, depending on what you sell. If you have food items, they may be tax-exempt, or even taxed at a lower rate. Clothing may be taxed, but only if the price of the item is above a certain amount.
What about shipping charges? Are they taxable? In some states they are, and in others, they aren’t. Sometimes a shipping charge changes the taxability of the entire order (for instance, if the customer chooses to pick up their items in your store).
Then what do you do with coupons and gift certificates?
Sometimes, a coupon will reduce the amount of tax due, but other times it won’t. A gift certificate usually does not change the tax due, because it’s simply a method of payment. (But remember if you sell gift certificates, that you usually shouldn’t charge sales tax on the purchase of the gift certificate itself.)
Sales tax automation takes all of this into account, too.
3. Charging the Customer and Collecting the Sales Tax
The next step is actually charging the customer for the sales tax due. This is done by adding the sales tax charge to the order, so that it gets collected at the same time the money for the rest of the order is collected.
Pretty straightforward, actually.
4. Reporting: How Much do I Owe, and to Whom?
At the end of a reporting period, it’s essential to know how much money you need to remit with your sales tax return. The reporting capability of sales tax automation is a key factor in this process.
In general, the process is to add up all sales tax collected, making sure not to include any cancellations, and then to subtract out any sales tax refunded when an order is refunded. It sounds easy, but nothing about bookkeeping is easy unless there’s a good process in place that’s followed consistently.
You also need to know where the funds need to get sent. If you collect sales tax in more than one state, it needs to be broken down by state. And often, it needs to get broken down further, by county, city, and other authorities.
Automating this bookkeeping and reporting:
- makes the process go more smoothly,
- avoids costly errors,
- and saves you time.
5. Remitting the Sales Tax Dollars
Finally, the money collected from sales tax on your orders must be sent to the right place, with the right forms, and at the right time.
Late filings can lead to penalties and a higher chance for an audit.
When you automate this process, you know that the money will be sent on time, helping you avoid those pitfalls.
Hopefully this overview has helped to explain what exactly sales tax automation is. Please let us know if anything isn’t clear so that we can expand on the topic as needed.