If your company is contemplating a development project that involves sales tax, you’re probably weighing your options for how best to handle sales tax compliance, including tax calculation, tax exemptions certificates and sales tax returns. This article can help you better understand the issues involved, so you can make a more informed choice for your company and your development team.
Sales tax: It’s complicated—and getting more complicated
Sales tax compliance can be complex and time consuming for a business, as both a technical challenge and a business problem.
In a recent Wakefield survey of more than 400 finance and accounting professionals across multiple industries, companies reported employing six people on average to manage sales and use tax compliance, spending at least 25% of their time (i.e., 460 hours per year) solely on sales tax-related activities.
The problem has only gotten more complex as the regulatory landscape keeps changing. In the U.S. alone, there were 36,254 changes to sales tax laws in 2017. The Wakefield survey showed that this increasing complexity has had an impact on staffing: Almost two-thirds of companies have hired additional staff to manage sales tax within the last five years—and even with additional staff, time spent on sales tax compliance increased by more than 2.5x.
Unfortunately, most businesses today waste an inordinate amount of resources on tax compliance, using inefficient and inaccurate manual tools such as free tax rate tables for calculation. These manual solutions can’t keep up with the constant changes in sales tax law, and they needlessly expose companies to tax liability and risk.
A tax automation API is a solution that can help you stay on top of tax law changes automatically, cutting costs and reducing risk. Tax automation can be especially beneficial for companies that are:
- growing rapidly
- expanding into new markets
- selling new types of products
- upgrading or switching between eCommerce platforms or ERP/back-office systems
- experiencing compliance issues, such as audits
The hidden cost of "free" tax tables
Younger, smaller companies often start out relying on free tax-rate tables, but they usually grow out of this error-prone, "do-it-yourself" solution. What are the limitations of tax tables? Here are the main ones:
- Tax tables are frequently out of date, which leads to audit risk. Remember the 36,254 changes to sales tax laws in 2017? Avalara has a large team working full time to keep the tax rates in AvaTax up to date and compliant. The AvaTax content team continuously monitors tax authorities and revenue agencies across more than 70,000 separate (but often overlapping) jurisdictions, including countries, states, counties, cities, and special taxing districts.
- Tax tables lack product taxability information. Knowing a rate doesn’t help you if you don’t know whether it applies to a given product, and even shipping itself isn’t taxed uniformly. Tax rates are famously unpredictable across product categories, with millions of different products and services down to the SKU level. (For example, did you know that in New York, tacos are taxable, but burritos aren’t?) This complexity only increases once you start crossing state lines, especially with modern fulfillment methods such as drop-shipping.
- Tax tables are not geographically precise. ZIP codes don’t align neatly with tax jurisdictions. You need rooftop-level accuracy to calculate tax with precision. Tax tables tend to show the highest possible rate for a given ZIP code, which can lead to a competitive disadvantage if you’re overcharging customers by 3% or more. The AvaTax API can also calculate tax accurately for digital goods or deliveries to "off-the-grid" locations like construction sites and ranches.
- Tax tables can keep you from establishing sound tax-compliance processes. In addition to all the reasons above, free tax tables can be a crutch that keeps your company from setting up predictable, compliant systems for handling sales tax efficiently and cost-effectively. Tax automation is pro-growth strategy for avoiding risk and unexpected audits.
Tax automation with Avalara’s API
A sales tax API such as AvaTax can bring predictability and flexibility to handling sales tax compliance. It can also reduce costs—upfront, by speeding deployment and integration, and long term, by reducing both audit risk and ongoing person-hours spent on tax compliance.
In fact, according to TechValidate, some Avalara customers have reported reducing the total amount of time spent on sales and use tax management by as much as 94% (i.e., from 24 days a year down to 1.5 days).
For developers, these are the primary advantages of the Avalara’s API:
- It integrates easily with your existing financial systems. With more than 600 existing connectors, AvaTax has robust, well-tested integration with most ERP, CRM, eCommerce and billing systems—including Salesforce, Sage, Magento, PrestaShop, and Microsoft Dynamics. All of our connectors are vetted through a partnership program to meet high levels of functionality and performance, and an internal Avalara team works full time to support many of the most popular integrations.
- The AvaTax API comes with strong developer support, both pre- and post-rollout. The AvaTax API has an active developer community, in addition to well-maintained documentation—with "Try Now" features inline, as well as sandbox and production Swagger UI. Developers can always ask Avalara’s Engineering Team questions during weekly Office Hours.
How do you evaluate a tax automation solution?
Sales tax automation using an API like AvaTax has many advantages. But how do you start evaluating a tax automation solution? Here are some steps that can be useful to think through as you’re getting started:
Onboarding. How easy is it to start using the API? AvaTax is a modern REST API with rigorous documentation and a library of available code snippets. Whether your development team is a single engineer or many, AvaTax has many resources to get everyone up and running.
Making your first API call. With AvaTax, you can make your first call quickly. Use the TryCreateTransaction Now feature in our online documentation to try real requests. Or you can go straight to a free trial on our full production environment with unlimited calls. Once you receive your license key, your dev team can quickly assemble your first request (a short JSON request, probably less than 45 lines) with help from our documentation.
Designing your integration/Defining workflows and mapping how the API should be called. When designing a sales tax integration, the best practice is to use one of the hundreds of pre-built integrations available for Avalara and popular accounting, ERP, eCommerce, quoting and other financial applications. The API is available to customize and extend Connectors, or you can use the API with a software development kit in the language used for your custom software platform. Either way, AvaTax workflows adapt to how you currently work, providing quick tax estimates anywhere in your process—whether that’s calculating tax upfront, along the way, or later (for example, even if a user furnishes an exemption certificate after the fact). An API shouldn’t disrupt your existing workflows or require you to change your user experience.
Planning the rollout. When you’re using AvaTax, our sales engineering team can help bootstrap your integration every step of the way. You’re typically assigned a dedicated representative to answer questions, provide assistance, and help get you rolling.
Must-ask evaluation questions
- Does the vendor’s solution meet our needs?
- What is the cost of our needs case? (Can we afford to do this? Can we afford not to do this?)
- Does the vendor have any case studies or testimonials?
- How long will it take us to integrate the vendor’s product with our existing financial systems? What resources will be needed to do so?
The bad news? Sales tax is complicated. The good news? The AvaTax API takes the complexity out of tax compliance.
With AvaTax, companies can rest assured that they’re staying on top of tax compliance with a well-established, accurate, and constantly updated solution—even if they’re selling new products or moving into new markets. For development teams, the AvaTax API offers a flexible, powerful, and highly customizable tool that works well with any workflow and that integrates easily with existing financial systems.
In addition to handling sales tax calculation, AvaTax can also work in conjunction with other Avalara services to automatically file returns and manage exemption certificates, to minimize audit exposure even further. Avalara CertCapture collects, validates, stores, and updates exemption certificates electronically so you can easily track and justify non-taxable transactions. Avalara Returns makes on-time return filing effortless, remitting all payments with a single ACH transfer.
If your development team wants to start evaluating AvaTax, they have many resources available to them. They can explore the API by signing up for a free 60-day production account, or they can research more at developer.avalara.com, in our Developer Guide, or at our weekly Office Hours. If you’re an eCommerce developer, be sure to check out our eBook – complete with code snippets – on how to quickly and easily build sales tax functionality into your online shopping cart.
Another useful way to start learning more about AvaTax is through our FreeTaxRates API or the many "Try Now" features in our documentation: