Simplify Global Tax Management Automation

By Ogo Nwanyanwu, Research Director, SAPinsider

 

Key Takeaways   

• Organizations selling goods and services across the U.S. are subject to complex “economic nexus” compliance requirements that can vary from state to state.
• Changing legislation makes accurate and real-time indirect tax calculation and compliance difficult, not only in the U.S. but also internationally. Avalara is expanding its tax management solutions globally to help organizations address the challenges of standardizing and automating indirect tax processes.  
• The Avalara AvaTax solution, available in the SAP Store, integrates with core SAP ERP, SAP Ariba, and SAP Commerce Cloud to enable automation of tax calculations, e-filings, and payments, among other tax management functions.  

  

Legislative Mandates Drive Need for Global Tax Management Automation 

The tax management function is growing more complex and on a global scale due to mounting pressure from local authorities to introduce real-time, indirect tax calculation and compliance processes. Indirect taxes — such as sales and use tax (SUT) and value-added tax (VAT) — are on the rise, and contain additional requirements based on business rules and fluid mandates compared to fixed tax laws that apply uniformly. These additional requirements are adding complexity.   

Data from SAPinsider’s Trends in Tax Benchmark Report highlights tax determination and indirect tax reporting as the top two pain points for the SAPinsider tax community. Rapidly changing indirect tax compliance requirements makes tax determination and indirect tax reporting more challenging for tax teams. The complexity around sales tax compliance represents a potential headwind for organizations expanding into new tax jurisdictions. We see this complexity reflected in our data, as SAPinsider tax professionals identified VAT and SUT as the two regulatory updates most impacting the workloads of their tax teams.   

The challenge of navigating indirect tax calculation and compliance on a global scale is clear, resulting in reduced capacity for accounting professionals to work on more strategic tasks.  Organizations managing manual processes, incomplete master data, and legacy ERP landscapes, coupled with documents and data existing in silos, can struggle with achieving accurate and efficient sales tax calculation and compliance. As a result, organizations are prioritizing opportunities for tax management automation, in part to address the complexity of indirect tax calculation and compliance across industries and regions.   

To better understand how organizations can address global tax management challenges, SAPinsider sat down with Christian Jensen, Director of Technical Consulting at Avalara to discuss the current compliance landscape around sales taxes in the U.S., indirect taxes globally, and how they impact product/service taxability in a digital economy.   

Avalara is an SAP Technology Partner, offering a suite of tax management solutions via its AvaTax app, designed as an end-to-end solution for tax calculation, document management, and returns preparation in a single platform. Organizations running SAP ERP instances of SAP Business One, SAP ByDesign, SAP ECC 6.0, and/or SAP S/4HANA can integrate Avalara’s solutions across core business functions to empower applications such as SAP Ariba and SAP Commerce Cloud. 

Link to Video Q&A with Christian Jensen, Director of Technical Consulting, at Avalara  

U.S. Economic Nexus Compliance Adds Complexity To Product/Service Taxability  

Companies selling goods and services into states that levy a sales tax must first determine if they have the required economic nexus (“nexus”) with those states. The 2018 U.S. Supreme Court landmark legal decision in South Dakota v. Wayfair, Inc. saw states successfully remove the physical presence requirement for economic activity. Nexus solutions are required by some state laws, which define nexus as “doing business” within their boundaries to help companies better define the product taxability of their goods and services.   

Currently, what is adding complexity to the equation are business rules that determine when a company needs to begin collecting sales taxes in new states adopting nexus requirements. A handful of states have passed legislation requiring non-collecting e-commerce companies to notify officials of their sales tax liability, but not every state has implemented this approach.   

The complexity of determining what constitutes nexus activity for a specific jurisdiction to support proactive compliance makes standardization and therefore, automation, difficult.   

“Tax laws in the U.S. are constantly changing, with over 14,000 different tax jurisdictions, ensuring your tax rate is ever-changing. It is critical to focus on the type of business you’re in and what your margins are, as your operations can be impacted by indirect taxes,” Jensen says.  

“You see customers that are very focused on transaction tax calculations and indirect tax, making sure they’re getting the right result, confirming they have the proper product taxability associated with the transaction.”  

Challenges of Indirect Tax Function Automation  

Data from SAPinsider’s Automation in Finance Benchmark Report illustrates the difficulty of automating indirect tax functions. Respondents counted indirect tax management among the most challenging finance functions to automate. Jensen confirms that SAPinsider’s research data aligns with his experience supporting Avalara customers. “We see customers continually want to find an automated solution that reduces the cost of ownership, reduces expense to their organization around indirect tax determination,” he says.  

In the same survey, our data showed that respondent organizations with a leading approach to finance automation were more likely to leverage key partners, such as SAP and Avalara, to support automation initiatives targeting the most difficult finance functions, which includes tax management.   

Avalara’s AvaTax offers sales tax compliance solutions that integrate with SAP ERP systems to enable more accurate tax determination and calculation by leveraging cloud-based content updates and geolocation technology. Tax management automation technology that offers economic nexus solutions can play an important role in helping companies determine sales tax requirements that apply to them across tax jurisdictions.  

Avalara International Expansion Helps SAP Customers Streamline Indirect Tax Function Across Regions  

With the economy becoming more digital and connected, the challenges around indirect tax calculation and compliance are not limited to U.S. transactions. The need for more robust compliance solutions for taxes such as SUT, VAT, excise, and transfer pricing is accelerating globally. Organizations require tax management automation solutions that support modern business needs across all regions and industries.   

To that extent, Avalara is expanding its solution offering globally in 2022 to enable SAP ERP customers with tax calculation standardization that accounts for the growth of cross-border financial transactions and increased local regulatory scrutiny. “Avalara is expanding its offerings from a solution standpoint well outside of North America into the E.U., and continues to expand our calculation logic internationally,” Jensen says. “Whether that’s Asia-Pacific, Latin America, or parts of the Middle East, we’re expanding because we see a strong need in the marketplace.”  

AvaTax App for SAP ERP is designed to help organizations improve accuracy and reduce costs while providing a fully integrated global tax management solution. Integrations with SAP Ariba and SAP Commerce Cloud enable organizations to streamline the process of tax compliance for SAP users. For organizations evaluating the integration of SAP applications with Avalara’s end-to-end tax management automation solutions, Jensen notes the opportunity to support your transformation journey as well. “More and more as we move into the future, you are seeing customers that are very much prioritizing the indirect tax function as a critical path to be successful for their transformations, either moving to SAP S/4HANA or implementing other bolt-on SAP applications like SAP Ariba or SAP Commerce.”  

Organizations can also leverage external application program interfaces (API) to support SAP/Avalara application integrations across core functions of the business to automate tax calculation during transactions in real-time, reducing the need for time-consuming compliance processes that prevent finance and accounting teams from working on more strategic opportunities.   

What This Means for SAPinsiders 

Here are some key takeaways that SAPinsiders should keep in mind as they evaluate their technology needs for sales tax compliance and tax management automation:   

• Evaluate your need for more granular content to enable more accurate indirect tax calculation. Trust in the data is a key requirement for the SAPinsider tax community regarding an organization’s approach to digital tax strategy. For the indirect tax function, granular content that provides timely updates across tax jurisdiction, tax rate, and product/service taxability is an increasing priority. Organizations considering business models that will accelerate cross-border financial transactions should align business activity with content update requirements.  
• Engage key partners to help modernize indirect tax processes. SAPinsiders view global tax management automation as an important priority but remain challenged by the difficulty in standardizing and automating tax determination, calculation, and compliance processes. The indirect tax function represents one of the most challenging areas to automate for SAPinsiders. Leveraging experts and partners who have a deep understanding of indirect tax processes can be critical to the success of tax automation investments.  
• Understand product/service requirements and how they may impact your organization’s tax exposure. Not only are indirect tax rates frequently changing across thousands of tax jurisdictions globally, but revenue authorities and regulators have also invested in more robust tax controls to support enhanced revenue collection. Organizations need to be proactive and future-proof their indirect tax function with automation and timely content updates to keep pace with regulatory updates, such as first-time-right mandates. Consider investing in global tax management solutions and integrations to support more accurate product/service taxability determination for clear visibility of potential tax liabilities.  

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