Published February 5, 2025
Understanding the Limitations of Sales Tax Automation
All posts
Sales tax is complex, especially if you're doing business in various states and jurisdictions. Many retailers turn to sales tax software and automation to simplify sales tax calculations and remittance. While an ideal scenario for many retailers would be to set up sales tax software and forget it, carrying on with their business without being bogged down by the stress of sales tax compliance, the software has limitations that don't make that a good choice.
Sales tax software and automated solutions can make mistakes that cost your business money if you don't pair them with the proper sales tax professionals. To create an effective sales tax process, you have to understand the limitations and downfalls of sales tax software.
Before we can dive into the limitations and challenges of sales tax software, we have to establish what sales tax software is and what it can do. Sales tax automation offers many benefits to e-commerce sellers. Understanding the capabilities and limitations of the system is key to ensuring ongoing compliance.
Sales tax software supports ongoing sales tax compliance and automates calculating, collecting, and filing sales tax. Instead of manually calculating each transaction, software allows sellers to easily and accurately calculate sales tax for each transaction and file state and federal taxes. Sales tax software often uses automation to streamline processes and remove the manual (and often error-prone) aspects of sales tax collection.
There are several leading sales tax software programs available, each with unique features and applications. Sales tax automation can handle complex and repetitive manual processes that used to require a human touch and create a bottleneck for transactions.
In general, sales tax software automates the sales tax collection process and can do the following:
Sales tax software and automation improve efficiency and accuracy in every transaction, making the complex world of sales tax easier to understand. Automation has saved e-commerce businesses millions of dollars and countless hours every year.
Although sales tax software can provide many benefits, it has limitations. When looking at sales tax software, consider these six common shortcomings.
Too often, retailers think of sales tax software as a “set it and forget it” system and don’t check the accuracy of its reports or calculations. However, accuracy issues are a major limitation of sales tax automation, which may lead to companies paying thousands of dollars in miscalculations.
Sales tax calculations can be complex, and software often miscalculates how much to collect or file. That often leads to retailers underpaying or overpaying with their sales tax returns. Accuracy issues frequently arise with refunds or credit transactions when the software can't properly apply sales tax, meaning the retailer pays the refunded sales tax out of pocket. Correcting accuracy issues can take months — if it happens at all.
Some sales tax software does a great job of collecting tax but not remitting it. If your automated software solution doesn't submit the collected tax to the appropriate tax authorities, it is still your business's responsibility. Your business could become overwhelmed by the burden of penalties and non-compliance, which can be hard to recover from.
Failure to properly remit sales tax can lead to serious consequences, audits, and penalties. It doesn't matter if it was the software that caused the error. Bottom line: It’s your responsibility to ensure your sales tax process is working.
Every business has unique needs and may want to customize their sales tax process. Sales tax software provides the convenience of a one-size-fits-all solution but can't provide customization to get the exact features or integrations you want.
For example, there’s a huge difference between how states tax professional service providers and how they tax software service providers. If your automation software misses this nuance, you might estimate a higher taxability than you have. It’s important to look for software that can handle taxability, exemptions, and incentive programs that change your compliance and match your industry. Sales tax software often only comes with certain integrations available, so it may not integrate into your technology stack and could cause more headaches than it solves. With limited customization, sales tax software can be helpful, but it still causes you to jump through hoops to work correctly.
The complexity of state sales tax is staggering. Compliance requires staying on top of constantly changing and complicated laws in 46 states. Sales tax rates and regulations vary by jurisdiction and can change frequently, and sales tax software often can't keep up with new regulations and rates.
When software doesn't use the most current sales tax laws, retailers can miscalculate sales tax and under or overpay. You could also miss out on opportunities for tax incentives because the software doesn't understand the nuance of complex tax laws. Without a careful eye on how your sales tax is calculated, you might not even know there's an issue until a customer complains or an audit reveals incorrect calculations.
Sales tax software is designed for basic transactions and often performs poorly for more complex business models. Automated systems often have difficulty handling things like exemptions, special tax treatment, or refunds, which are fairly common and important transactions for most retailers.
Most sales tax automation solutions have taxability and rates built into hundreds of automation codes. The problem comes when the solution doesn’t assist with choosing the correct code to match your product and service SKU or lines of revenue. This becomes an issue for retailers selling products in different counties or states with different tax rates when the taxability code you choose can make all the difference in accurately collecting tax. Retailers that have multiple revenue lines, such as from different types of physical or digital products, often can’t rely on sales tax software to correctly handle their taxes without human oversight.
The big draw of sales tax software is that automation makes calculating and remitting sales tax easier and simpler. However, that reliance on automation can also be the software’s downfall when getting customer support and finding answers to questions or issues is difficult.
While you may receive software support from your automation solution, you’re likely not getting expert support. True peace of mind and expert advice can only come from a state sales tax professional, not from software.
There are many moving parts to processing and correctly filing state sales tax returns. You need an expert to help you sort through it all and ensure you’re fully compliant, confirming that the proper amount of sales tax is remitted on every transaction and that you're not paying out-of-pocket any additional tax that wasn't collected. When relying entirely on sales tax software, getting human help can be cumbersome — if it's available at all — and often connects you with agents for technical support but not sales tax advice.
Sales tax software limitations aren't just theoretical; they impact real-life businesses every day. Last year, we worked with an e-commerce seller that received a $1 million liability assessment from an automation platform. The problem was that automation had failed to account for tax exemptions and marketplace sales, which could reduce the seller's liability. Working with a sales tax specialist instead of relying on software helped the retailer reduce its liability from a million dollars to almost zero.
Just because sales tax software has many limitations and downfalls doesn’t mean all sales tax automation is bad. Automation can greatly benefit retailers by giving you more time to spend on more creative, business-building tasks instead of doing repetitive sales tax-related tasks.
There are several alternative solutions to automating sales tax. Consulting services act as an outsourced tax department staffed by people, not just technology. Retailers can hire consultants for varying service offerings, from handling all sales tax-related transactions to only filing reports or ensuring accurate calculations. Consultants balance numerous clients but can still provide personalized care and expert advice to ensure your business is compliant and has a smooth sales tax process.
Another option is an in-house tax department. With this model, an employee or team of employees is hired solely to focus on tax issues, especially sales tax. By dedicating all of their time to tax, these employees can become experts and stay on top of changing regulations and rates. An in-house tax department is always available and has an intimate knowledge of your company and its products, meaning they can provide accurate, personalized recommendations. The downfall is that this option can be costly, especially for smaller retailers.
Sales tax software benefits retailers but isn’t always perfect, especially when it isn’t monitored and given human oversight. To stay compliant, retailers must understand the challenges and create processes and partnerships to overcome the limitations of sales tax software. If you want to learn more about sales tax and how to prepare your business with a smooth sales tax process, no matter where you're located, contact The Sales Tax People to get started with a customized sales tax system for your business needs.
We care about your data – privacy policy
