Using SAP to Manage U.S. Sales Tax from Overseas

⇨ Many overseas organizations operating in the U.S. struggle with its complex tax calculation system.

⇨ Organizations operating in the U.S. must consider the type of product and customer, as well as the states, sales channel, location, and exemption when calculating sales tax.

⇨ Relying on an external software solution can help bolster SAP tax calculation capabilities.

A Quick Overview of US Taxes

With complex and varying compliance rules across the states, sales tax can present a significant and burdensome barrier to successful trade in the U.S. This challenge is heightened by the increasing scrutiny on reporting by state tax authorities looking for additional revenues.

• Independent tax regimes: U.S. sales tax is a consumption tax on the sale of goods and services to the end consumer. Unlike VAT or GST, it is only levied on the final transaction with the customer, and there are no charging or reporting requirements for the companies in the supply chain. In most situations, the seller is held responsible for the calculation, collection, and settlement of tax to the state. It is charged by state and local authorities and administered by the merchant who is responsible for charging a combined percentage tax. A merchant must charge sales tax if it has a nexus in the state, which can be a physical presence of employees, property, or inventory. This is similar to the permanent establishment concept.
• Complex U.S. sales tax compliance: Each state sets and operates its own compliance regime, which creates complex variations in:
  • Which goods and services are liable to tax (e.g., food and clothing is often excluded)
  • Invoicing requirements (e.g., legal basis of tax)
  • Registration requirements with each state authority
  • Reporting timetables and deadlines
  • Sales tax returns
  • Fines and penalties for noncompliance
  • Tax audit processes

Common Pain Points for Companies Affected by U.S. Sales Tax Calculations

For companies with a presence in United States, there are three pain points in this area (which we will try to solve during this article):

1. Calculation of the tax percentage for each invoice: In this article, we will explain why this process is complex and different from the majority of the countries.
2. Sales tax declaration for each state: If a company is present in different states, sales tax should be presented with different deadlines. For accountants, this is a headache and a time-consuming task.
3. Cost of the implementation of a tax calculation system: Historically, there was one or two vendors to help in this area, but the cost was very high. Now we have an option that is cheaper than these vendors, which makes SAP integration more affordable.

U.S. Differences in Tax Calculation

In most countries, it is easy to calculate taxes for sales invoices. Normally, tax calculation is based on the following variables:

1. Family Product (Education, Basic Product, Alcohol, etc.): Products are assigned in each country to certain families, and each family is assigned to a fixed tax percentage.
2. Customer Type: Typically, if the customer is local or foreign.

Based on these two variables, tax is calculated during sales and is printed on the invoice.

But in certain countries like the United States, calculation is very complex. The calculation of tax of the invoice depends on the following variables:

1. State in which the sales invoice is performed
2. Sales Product
3. Sales Channel: B2B, B2C, Marketplace
4. Location of the customer
5. Customer has a specific tax exemption

Transactions may have a different tax percentage if you sell the same product from a different state. Or it can be different if you sell from the same company code, but the customers are located in different states.

In the United States, tax percentages commonly have continuous variations. Depending on the state, percentage maintenance can become unmanageable and it turns into a significant pain point for many companies. Besides, there are different taxes for a single invoice (state, county, city, and special tax.)

How Are Taxes Managed in SAP?

In SAP, there is a transaction called VK12, which is the basis for the tax calculation of the invoices. In this transaction, users should maintain the condition records to accurately calculate taxes.

Normally, there are different access sequences to maintain tax calculation. Most of them are based in material type and customer type classification.

Once an invoice is created, SAP determines the total invoice from products or services sold, calculating discounts, transport costs, and taxes. Normally, the condition type in most of the SAP systems is MWST (but it can be something else if the customer is adapting the standard one).

According to this transaction and based on the number of variables for sales tax calculation in the United States mentioned in the previous section, it is mandatory for SAP to record this data in customer master data and VK12 so it can contain any possible combination. In this case, it is necessary to link the company code to tax procedure TAXUSJ in SAP. TAXUSJ activates Jurisdiction Code information in master data, and later you should enter this information in VK12 based on jurisdiction code.

Although it is technically possible to use this approach for a U.S. company code and it is totally standard, this is not sustainable if you are selling different products to a medium or high number of customers. For instance, if you are selling to a customer within a new jurisdiction tax code, the SAP system is not able to calculate the tax code and it will trigger an error. Besides, it is common in U.S. to change the tax percentages of products, so it is very complex for an accountant to maintain all tax codes without error.

Best Approach in SAP to Manage U.S. Sales Tax

As sales tax causes significant problems in the U.S., SAP recommends using external software to calculate this tax amount.

Now we will explain how you should customize SAP to integrate this software:

1. Customize tax procedures according to this software (usually TAXUS or TAXUSX instead of TAXUSJ).
2. Adapt sales procedures to external software.
3. Customize external software and link it with customer master data or material master data. For instance, you should have the customer address according to this external tool and material master data in SAP linked with the material family of the external tool. Here, customer code address validation can be checked real-time using a specific API.
4. Mark customers subject to tax exemption. Software can manage customer tax exemptions (including tax exemption certificates) and return some alert messages once tax exemptions certificates are close to the expiration date.
5. Use real-time calculation during sales invoice creation. During sales invoice (or even in sales order creation), external software is called via API with all necessary data in SAP for calculating U.S. sales tax. Once external software calculates tax for an invoice, the result is returned to SAP and printed on the invoice.

As this external software has all the information regarding the sales invoice, accountants can use it to present each state’s U.S. sales tax declaration.

To achieve that, enter the states you should present a declaration for, and the system is able to send an alert message to the U.S. tax accountant in order to inform monthly deadlines.

The U.S. tax accountant validates the information contained in external software and once they confirm its accuracy, that information is sent to tax authorities.

Further Information

If you require more information about our implementation projects for U.S. sales tax calculation, you can email me at dvives@cuviv.com.