The Wild West of Sales Tax
Back in 2013, I was asked to speak on sales tax at the National Press Club and House of Representatives in Washington, DC. The main theme of my presentations was that technology is the answer for solving the challenge of multi-state sales tax compliance. I fielded a lot of questions about the concerns for small and mid-sized businesses (SMBs). As it turns out, the main theme was flawed.
Sales Tax Compliance: Then and Now
Fast forward to June of 2018, and the Supreme Court decision ruling in favor of South Dakota v. Wayfair opened up the option for states to bind companies to collect sales tax based on sales volumes. Economic Nexus was born and in classic fashion, each state rolled out their own rules. The hopes of a more uniform set of laws were replaced by a state induced environment for creating the Wild West of Sales Tax.
The demand for sales tax technology providers was at an all time high. Companies of all sizes now needed sales tax technology to support their growing requirements for more states. Small companies with $1 million to $40 million in annual revenue were now dealing with the same sales tax complexities that enterprise customers have with one big difference - they didn’t have the in-house expertise or resources to support it.
Sales Tax Technology in the Wild West
The sales tax technology providers viewed the small companies as a group of customers that needed to be pushed down a self-serve path to preserve profit margins. The assumption was that these companies would actually read the pages and pages (and pages!) of documentation on sales tax, actively track changes, and make the right decisions on their account. Once again, these assumptions were flawed.
To fill the knowledge gap, tax service companies jumped into the fray for an opportunity to add a new service revenue stream - managing the tax software for clients. This model has value as it injects subject matter experts (SMEs) into the process, but you’re now solving One requirement with Two companies.
The service company and technology provider relationship also does not always provide the necessary level of synergy to ensure customers get timely and effective support.
The Wild West of Sales Tax for small businesses has today become a reality as they struggle with sales tax. In my 12 years in the industry, I’ve never seen it this bad. Mistakes include:
- Collecting sales tax but not registering in states to remit
- Not registering in states after triggering nexus
- Not mapping product tax codes to support exemptions
- Past due state filings accruing interest and penalties
- And many more!
Most of these businesses wanted to comply, but didn’t have the right process or partner in place to manage it correctly. Multi-state sales tax compliance is annoyingly complex and it’s easy to make a small or unfortunately big mistake even when trying to do it accurately and on-time.
The Future of Sales Tax Compliance for SMBs
A company I used to work for had the creative slogan “Less Taxing, More Relaxing” which included that perfect beach picture with a few palm trees, comfortable chairs, and a couple of cold margaritas. There are many small businesses that want to find a way to this beach. Maybe a managed solution which combines technology and tax expertise under one (beach) umbrella? And to ensure you have time, spending 2 minutes per month on sales tax is a good start.
In 2023, there were a record-breaking 5.5 million new business applications filed. Some of these companies will sell interstate, experience fast growth, and eventually need to address multi-state sales tax. That beach is going to need a lot more chairs!
Matthew Grattan heads up partnerships and sales for Zamp. He’s worked in the sales tax industry for over 12 years. Matthew currently resides on Bainbridge Island, WA with his wife, 3 kids and dog, Ruthie.
