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A Basic Blueprint for Transactional Tax Automation

Jan 31st 2017
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These days, licensed tax professionals and their highly capable staffs must be software-savvy. Yet, at every stage in our relationships with clients or employers, we are awash in software tools and applications, and today, there are still concerns about cloud-based applications and remote data storage.

Tax professionals are obligated to have a firm understanding of the software solutions they use and recommend, so don’t feel left behind, even if you haven’t completely fallen for cloud-based solutions. However, one area of tax compliance where cloud-based applications are becoming the norm is transactional tax compliance.

Transaction-based tax compliance (think calculation, returns filing, and remittance for sales, use, and value-added taxes) has always been ripe for automation, due to the high volume and restricted time windows that accompany it. Nowadays, transactional tax automation is often housed in the cloud.

There are numerous providers in the cloud-based transactional tax market. Here are four key areas you need to know about when it comes to a cloud-based transactional tax solution:

1. Connecting to the cloud. Any cloud-based transactional tax solution requires an effective connection with your own accounting or enterprise resource planning (ERP) software. This connection is really twofold: a proper and reliable Internet connection and software code that translates the data in your accounting or ERP system to a cloud-based solution. Establishing and maintaining these connections is an IT, as well as a programming, obligation.

The level of integration between an accounting/ERP system and a cloud-based solution varies, but the bottom line is that any cloud-based transactional tax solution is worthless unless it receives all required elements for all transactions – every time and on time. Therefore, your clients must have flexible, customizable, and reliable data, and software connections to the cloud.

2. Setup. One of the best arguments for any cloud-based solution is that a single software application can be used by multiple users simultaneously. This model reduces costs, eliminates the need for on-site updates, and allows developers to expand the list of available bells and whistles.

However, because cloud-based solutions are developed to appeal to a wide swath of user requirements, it is incumbent upon users to pay careful attention to their setup. Establishing and maintaining proper setup is a programming obligation and an informed tax professional’s obligation.

In a transactional tax scenario, the identification of individual products, locations, transaction types, and even specific customers are critical to an accurate calculation. At the outset, a cloud-based solution requires close attention to properly identify these elements and map them in the cloud.

For example, in the sales tax realm, processing appropriate addresses, product-specific SKUs, shipping terms, nexus obligations, or the application of customer-based exemptions are only a few of the elements necessary to accurately calculate tax. These elements are unique to individual vendors and must be translated or mapped to a cloud-based solution before the solution can be reliable.

3. It’s reporting time. A cloud-based transactional tax solution must do more than calculate taxes due on any given transaction. These solutions must provide extensive reporting capabilities, many of which are customizable for specific requirements.

Naturally, accurate calculation of each transaction is important for tax compliance and, perhaps, the most important function from the point of view of your client’s retail customers. Yet, useable periodic reports are perhaps the most important element for tax professionals. Developing, testing, and producing effective reports are an obligation of programmers and informed tax professionals.

State and local transactional tax reporting invokes many requirements. Reporting based on geography and discrete time periods is perhaps the most obvious, but this type of reporting may also involve product or exemption types and specific customers. It may even provide critical data for audits, both internal and (gasp!) external. Finally, a customizable reporting function can really be useful for the automation of sales tax return preparation, or at least shaving valuable time from current manual processes.

4. It’s filing time. The calculation is complete, the invoices are sent, and the reports are accurate and useful, so what’s next? Automated filing of returns is a service offered by more than a handful of cloud-based transactional tax providers.

This type of automated filing solution really comes full circle when a provider culls reporting information from a client’s records and populates the appropriate forms. In the United States alone, there are hundreds of unique transactional tax reporting forms and formats, and a cloud-based returns solution can automate that preparation obligation.

Under a typical cloud-based transactional tax solution model, a client periodically reviews transactions housed in the cloud. Once the client is comfortable with the calculations found there, he or she will be prompted to approve those transactions for inclusion on appropriate forms. Even the reconciliation required to make these approval judgments can be automated over time, as a client becomes more and more confident that a cloud-based solution is providing materially accurate information. Remittance of taxes collected is often accomplished by an electronic transfer of funds from a client’s account to a revenue authority, orchestrated by the cloud-based returns solution.

Thank you for getting this far on our 30,000-foot view of an automated transactional tax solution in action. There are several other important considerations, including exemption certificate management, the complexities of proper setup, ERP compatibility, and technology limitations, just to name a few. It always pays for tax professionals to be informed and educated. Your clients and employer will definitely appreciate it.