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A survey of sales, use, and VAT tax solutions.

As a business progresses through the growth cycle, from start-up to Fortune 100, there is a need to assess periodically the methods and systems used to comply with sales, use, and VAT tax laws. This need can grow as the company itself grows, from doing business in a single state to doing business in all states and internationally. With expansion, the costs of noncompliance--with taxes being imposed at 4.5 percent to 10 percent on the top line--can create tremendous financial (and reputational) exposure. If handled properly, the sales or VAT tax is generally collected from the consumer and does not become a liability of the business. If proper systems are not put in place, however, problems can escalate quickly into a large liability for the business.

This article surveys the domestic tax solutions generally in use to determine sales, use, and VAT taxes. The solutions range from the use of a basic tax table to the recently available enterprise class solutions. While not exhaustive, the article provides basic information to advance an understanding of the alternatives and of why one solution may be a better for a particular set of circumstances than another. Vendors are listed in alphabetical order and represent no favoritism.

Tax Tables

For the simplest solution, many applications allow the loading of tax tables supplied by third parties. These tables are readily available from ADP Taxware, CCH, RIA Thomson, and others. When loaded into the application, they are accessed during a tax calculation based on the ship-to address.

Some applications are even more rudimentary and use only a tax code. This adds responsibility to maintain both the tax rates and the association of the customer or vendor to one of these tax codes. This approach works best when doing business in only a few states and having limited nexus considerations. Some of these applications may provide the opportunity to have customers marked as exempt and also handle limited product exceptions.

Drawbacks and limitations include:

* The solution is limited to that one application. If there are multiple applications needing taxing capability, the tax tables and maintenance needs to be duplicated for each occurrence. This adds additional complexity and costs.

* There is limited or no opportunity for maximum or varying tax conditions. In some jurisdictions, the tax may cease or the rate may decrease if the transaction exceeds a certain value.

* There is no opportunity to have a full jurisdiction determination considering the ship-from, order acceptance, and order origin locations. This can affect the proper selection of taxing jurisdiction and rate.

* Reporting is limited to what the host vendor supplies. Depending on the complexity of the business, this may require custom programming in order to obtain the proper information necessary to complete returns and remit tax.


The next level of solution is the bolt-on solution. So named because the tax vendor supplies an application to determine taxes and it is integrated or "bolted on" to your ERP. Main vendors with this approach are ADP Taxware and Vertex.

The application supplied by the vendor allows for a more complete tax determination that properly considers a full jurisdiction (i.e., ship-from, order acceptance and order origin locations) and supports maximum tax conditions. The tax vendor maintains the software to meet changing tax law and generally can provide an interface with the host application if supported.

There is usually a variety of technology (computer languages) employed. These options range from C, PLSQL, COBOL, RPG, and others to provide a choice fitting for your environment

Drawbacks and limitations include:

* The solution is limited to that one application. If there are multiple applications needing taxing capability, the tax tables and maintenance must be duplicated for each occurrence. Support of multiple applications is usually possible, but vendors often limit connections by licensing (i.e., additional license fees will usually have to be paid for each application).

* The user interfaces for these applications are usually client oriented, adding to the overall cost. Web-based user interfaces are sometimes available from the vendor or third parties.

* The tax vendors provide many out-of-the-box interfaces, but you may find you need to develop a custom interface for an unsupported application. The interface is no small task and is often the source of most of the tax solutions issues.

* If you need VAT calculation, a second application is required.

* Specialized taxes are not considered.

* Applications are rigid and require IT involvement for customized tax conditioning.

Hosted Solutions

With the advent of the Internet, it became possible to host an application at a remote site but have access to it as though it was local. This involved someone taking a tax vendor solution, hosting it, and then selling the access usually based on transaction volume.

Drawbacks and limitations include:

* The same as mentioned under "bolt-on's"

* You become dependant on their IT group to ensure that the application stays up and running.

* There is some risk that confidential data may be compromised.

* Continued cost (if it is not a certified provider) (you need access to the data for 3-5 years in order to comply with audits) and risk of loss of data when an agreement is terminated or with a change in hosts.

Enterprise Class or Transactional Tax Application

Credit has to be given to the founders of Sabrix for what is being called today as an enterprise class or transactional tax application. ADP Taxware and Vertex have since followed this new vision. The concept started as a hosted solution idea and evolved into a major improvement for sales, use, and VAT tax processing.

Changes from a "bolt-on":

* This application type was designed to be a centralized application and support multiple calling applications. The benefit of this design is that multiple systems needing tax decisions can now connect into a single set of taxing rules. This adds a high degree of centralization and control without limiting flexibility.

* The user interface is web based making it easily available throughout the company without adding expensive infrastructure.

* VAT calculation is built into the same application. The tax tables are also open for the construction of specialized taxes for which you may have responsibility. This eliminates the need for additional or side systems.

* While IT resources are needed during implementation, these applications generally have very flexible user interfaces that allow end-user access to the tax calculation rules. This empowers the tax department to initiate updates and changes to the tax calculation rules that previously required IT involvement. The primary benefit of this is reducing the tax department's dependency on IT.

Drawbacks and limitations include:

* Being new applications, there is a certain amount of shake down that has to be done.

* The application pricing is usually higher.

* Being newer, there are fewer integrations to source applications.

Do not be confused and believe that each step is a better solution than the previous. There are good reasons why each could be the right answer. Deciding which solution is best for you depends on your current needs and your company's potential for change or rapid growth. For example, if a company is a local retailer, tax tables are likely all it need. In contrast, the enterprise solution may be best if there are multiple calling applications or the need for VAT or other additional taxes.

Charles Tobey is a Director of Tax Technology with DuCharme, McMillen & Associates, Inc., an independent tax software consultant that provides customers with consulting and installation services of all vendor software. A graduate of Clarkson University, Mr. Tobey's industry experience includes working for General Electric Company, NCR, and Sabrix. He may be reached at,
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Author:Tobey, Charles
Publication:Tax Executive
Date:Jul 1, 2007
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