When businesses build their own payments solution, they get more control over their revenue. But they are also responsible for the flip side of that particular coin: taxes.
Accepting payments is one thing, it is considerably more complex to pay what’s due in federal and state taxes. It’s not enough to facilitate tax charges through a payments system. Businesses must know what levies are due, comply with the requirements of individual states and do everything without ruining the customer experience.
Here’s how to handle those challenges.
The Complexity of Tax Compliance
U.S. tax law is complicated and has only become more so due to recent developments in how online tax is calculated.
Traditional sales tax is governed at the state level. Businesses have to deal with 46 different sets of rules as a result. Worse, tax rates vary considerably from state to state, as do sales tax exemptions.
Online sales tax laws are even more complex. The complexity stems from a 2018 court ruling, South Dakota v. Wayfair, which made it legal for states to collect taxes for online purchases, regardless of where the seller is located.
Calculating that tax obligation is not as simple as adding a percentage to the final bill, however. Different states have different definitions of what constitutes a physical presence (commonly called a nexus), different revenue thresholds that incur sales tax and different exceptions.
The vast majority of states — 46 of them plus the District of Columbia — have an economic sales tax nexus, writes Joshua Sophy, assistant editor at Small Business Trends. Most of them set the threshold at $100,000. Alabama and Mississippi have a $250,000 threshold, and California, New York and Texas have a $500,000 threshold.
Let’s add further complications. Wayne Rash at PCMag notes there are more than 10,000 unique tax jurisdictions in the U.S. Each of these can have different tax rates, collection criteria and payment processes. Businesses have no choice but to deal with it, he says: “Unless the US Congress decides to create legislation that would somehow simplify all of this, your business will have to find a way to deal with compliance, including charging the correct sales tax, maintaining exemptions where appropriate, filing proper business tax returns, and, of course, paying the correct amount of tax to each state and locality.”
There’s no getting around it, either. States are serious about collecting what they’re due, says Charles Maniace, vice president at the tax software firm Sovos. Maniace tells Forbes that he expects California, New York, Ohio, Illinois, Washington and several other states to step up their enforcement soon.
Can Software Solve the Issues?
Fortunately, for businesses of any size, technology can help solve almost every tax compliance issue. Many point-of-sale (POS) and e-commerce platforms like Shopify, Square, PayPal and Vend offer sales tax solutions alongside their POS service, Bennett Conlin writes at Business News Daily.
For enterprise-level payment processing, however, the solution will be more complex.
One option is to integrate with third-party software. The issue: off-the-shelf solutions can create new problems, especially if they don’t integrate well with existing systems. Rob McGrorty, a product leader at Google, calls this a “faux integration.”
“Apps that center around the same business functions should work seamlessly together,” he writes at Total Retail. “For example, payroll is executed in a payroll system that needs to connect to an accounting system. If that payroll system doesn't integrate and push data with enough detail to reconcile, it's useless. And if it's not pushing all the information with the click of a button and at a granular level that can be attributed to different parts of your general ledger, it's useless.”
How to Overcome Tax Complexity With a Custom Solution
What does a good custom system look like if off-the-shelf third-party software isn’t the answer? First and foremost, it needs to integrate with new or existing payment systems.
Because tax matters are closely intertwined with payment processing and finances, organizations should integrate these systems wherever possible. By integrating tax and finance matters, businesses can achieve a streamlined approach to calculating, charting and paying taxes.
The right solution will also streamline the reporting process. Good sales tax solutions will automate everything through to data collection and the filing process, Jennifer Clark writes at G2. This is incredibly important given the number of states businesses have to file with.
“Handling your operations manually often takes multiple days of work to perform the sales tax calculations and file with each jurisdiction where you have nexus,” Clark points out. “Not to mention, as you have nexus in new states, it takes time to register every where you plan to file. When this is automated, a worker who would have spent days or weeks managing sales tax can often get the job done in just a couple of hours, depending on how deeply you want to use automation.”
Because sales tax must be collected at the point of purchase, any solution must also take into account the checkout experience. Tax rates must be calculated during the checkout process, and it must happen quickly. Geolocation technology offers the best solution for instantly determining the right sales tax, writes Gail Cole, a senior marketing writer at Avalara. That’s because sales tax rates don’t always match ZIP codes.
International businesses will also need to account for local tax preferences, writes Alex O'Byrne, co-founder and director at We Make Websites. “For example, in the United States, online shoppers are familiarized with experiencing extra fees for tax and VAT at the checkout and don’t usually expect to see tax or VAT included in product listings. However, in the European Union, product listings on e-commerce sites are legally required to include the value-added tax.” It would ruin the user experience for any European shopper who sees the price unexpectedly surge at checkout.
The complex nature of tax liability means it isn’t easy to find a one-size-fits-all solution when it comes to compliance. Off-the-shelf solutions, which seem simple at first, can put data security and business continuity at risk. Custom developments may be a substantial investment, but they are the only way businesses can have full control over their payments systems and guarantee they comply with tax laws at home and abroad.