Arizona voters’ approval yesterday of a temporary 1 percent increase in the state’s sales tax underlines the points I made in a recent post: Sales and use taxes are creeping higher around the country, and they now rival state and local income taxes as a rising compliance challenge for business. The Arizona decision may encourage other states to attempt to patch up the holes in their budgets with rate hikes.

It’s the constant changes in rates and rules that make sales and use taxes such a challenge for businesses to track and manage, and which also explain the vibrant health of the best-of-breed technology sector that helps companies cope.

Simple Web-based applications that provide rate lookups and basic compliance tools have been around for a decade or more and can be helpful for smaller organizations operating in a few states. Many vendors also offer comprehensive packages that integrate with ERP systems, apply rates automatically in real time, and feed the data into the returns for the various jurisdictions.

Most ERP systems have some tax calculation capabilities of their own, and companies can try loading sales tax rates directly into them. But that still leaves employees with a lot of decision-making around the tax attributes of each transaction, notes Steven Parish, managing director of state and local tax with audit and consulting firm RSM McGladrey. “If you’re shipping many items, which ones are subject to tax, and which are not? Is this product taxable where it’s being shipped? How is it being used by the customer? ERP systems can calculate the tax, but if you’re looking for tax logic, that’s where the automation of a third-party system comes in very handy.”

The good news is that specialized sales and use tax software is becoming steadily more affordable and is now well within the budget range of many midsize companies. “We’ve seen an explosion of applications that are meant to integrate with your midtier ERP systems — your Sage products, Microsoft Dynamics, Epicor — all of those applications that are used by companies that range from maybe $5 million to $300 million or $400 million,” Parish says. “It used to be just the larger applications that provided some of the tax decision-making regarding the regulatory authority, what’s taxable, what’s not, and so on. But now some of the systems that fit that midtier group are on an equal footing with the larger ones; they’re providing that kind of functionality as well.”

That could be a real boon for smaller tax departments, where resources are usually stretched thin and staffers routinely wear multiple hats.

For more about sales and use tax software, see Robert Kugel’s Business Finance article “Make Taxes Less Taxing.” ###