I’ve noted a couple of times in recent weeks that as states feel the economic squeeze, they’re looking around for new sources of income, including sales taxes on Internet commerce. Robert D. Kugel has noticed the same trend, and in this month’s issue of Business Finance he argues that “this should serve as a reminder that if your company isn’t already using software to do a more efficient job of determining what it owes in sales and use taxes and finding more effective ways of minimizing them, this time has come.”

Kugel is senior vice president and research director, financial performance management, with Ventana Research, and a frequent contributor to Business Finance. His latest “Software Scorecard” report offers thumbnails of some of the leading software vendors in the sales and use tax management space. (It’s worth noting, too, that some of these firms also offer outsourcing services.)

Can’t you just load transactional tax data into your ERP system and keep track of it there? Not a good idea, says Kugel, because you don’t want to keep tweaking that core system as the multitudinous laws governing these taxes shift and mutate. “It’s far better to pass the information contained in an invoice or other transaction to a third-party tax calculation application,” he notes, adding that “these records contain enough identifying data elements to enable your company to avoid mistakes in calculating tax liabilities.”

I’d add a couple more reasons why it’s worth taking a good look at these tools.

First, they can provide a way out of the spreadsheet labyrinth. Spreadsheets are endemic in corporate tax processes, and transactional tax compliance is no exception. Their weaknesses are well known: They’re error-prone, they allow users to hard code over key formulae, and they lack version control. Offloading some of the work that’s currently done in spreadsheets onto a dedicated system can hugely streamline compliance and reporting.

Plus, some of these systems can help you manage exemptions. In the realm of sales and use tax, being exempt from the obligation can be almost as big a headache as being liable. Companies that offer multiple products have to figure out which ones are taxable and which are not, and in which jurisdictions. Managing and verifying exemption certificates is a big time drain, and failure to keep on top of it is a major red flag for auditors.

Related blogs:

The Sales Tax Shambles

States Eye Internet Sales Tax

Targeting the Nexus Mess — Again

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