Compliance and reporting regulations are changing around the globe at a rapid pace. From economic nexus legislation in the U.S. to digital tax and near real-time tax reporting internationally, these changes are forcing businesses of all sizes to determine the best measures to minimize the added risk being placed on them. Because compliance is so closely tied to risk, many businesses look at effectively managing it as a requirement that provides no return on investment (ROI). However, the task of managing compliance and doing so correctly does come at a cost for businesses and, if done efficiently, can positively impact a business’s bottom line.
Historically a manual task, compliance has been and continues to be in many cases, managed by individuals in finance teams, outsourced to accounting firms, or dealt with by business owners themselves all of which costs businesses countless hours of personnel time and operational cash burn that provide no value to customers. As businesses have become more heavily reliant on the internet to reach more customers, the thought of manually managing compliance has become absurd. That’s why many businesses have turned to automation and technology to improve their compliance functions, but many still struggle to see the ROI or positive impact of an efficient compliance operation.
Manual tax compliance and its impact on ROI
If your business is managing tax compliance in-house, it’s likely that you have one person or several people spending an ample amount of time per month preparing, generating, and remitting tax. The manual management of tax is often resource-intensive and financially burdensome for most small businesses, especially when compared with other alternatives. If your business is looking to identify finance processes that can be improved to increase efficiency, there are several questions that should be asked when evaluating your tax compliance processes, including:
- How many hours per month are spent on tax calculation and reporting?
- How many employees are involved in the tax reporting lifecycle?
- How accurate is our tax collection and reporting in the event of an audit?
- How is my business ensuring that the right amount of sales tax is collected?
The digitalization of commerce has made it nearly impossible for businesses to manually manage tax compliance and also ensure they are charging the right amount of tax on sales. With more than 12,000 taxing jurisdictions in the U.S. alone, a business that sells to customers across the country has the potential to trigger sales tax obligations in thousands of jurisdictions. And, with nexus laws and boundaries changing every day, manually staying on top of tax obligations can quickly become a full-time job.
It’s not just audit risk and nexus requirements that make manual tax compliance an inefficient approach. In fact, it’s common for small businesses to overlook many pitfalls when it comes to sales tax, including missing or invalid exemption certificates, incomplete product and services taxability research, filing the wrong forms, and more. If mishandled, all of these situations have a direct impact on a business’s efficiency and require more of an investment by business owners to try and stay compliant.
Tax automation and its impact on ROI
The patchwork of rates, exemptions, deductions, forms, documentation, filing obligations, and enforcement techniques of sales tax created by taxing authorities is well-suited for automation. Because the technology exists today that allows small businesses to automate and digitize nearly every finance function, automating tax compliance allows businesses to integrate solutions directly into the business systems they are already relying on.
Unlike most manual processes, automating tax compliance provides businesses with ample benefits that tie directly to visible ROI, including:
- A foundation for growth–Technology provides the flexibility to adapt your business and tax obligations as a business grows into new areas or product sets.
- A conduit for data visibility–Technology integrates with existing ERP and point-of-sale systems, which makes it easier to better understand where you sold a product and to whom.
- A clear audit trail–Technology creates an archive of your business’s tax reporting history to be prepared if and when an auditor comes knocking.
Business owners have a number of responsibilities flooding their brains on a daily basis–many of which have a direct impact on the customer experience. By automating tax compliance, businesses can allocate more human brainpower to the tasks that have the biggest impact on the bottom line. In fact, according to Forrester, automating sales tax compliance can save businesses roughly $385,000 over five years.
In the digital age, businesses must go beyond the “checked box” mentality of compliance. While the act of collecting and remitting sales tax provides no true value to the business, the manner through which businesses handle their compliance obligations has a direct impact on a business’s bottom line. By leveraging technology to automate the compliance process, businesses can begin looking at compliance as a channel to improve processes, save money, and more efficiently serve customers.
Tax compliance stock photo by Sean K/Shutterstock
