Sales and use tax relationship with origins and destination locations

Find out interesting insights with Claudia Mejia, Managing Director,Ikigai Edge

Moderated by Emily, Digital Transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Emily: Hi, everyone. This is Emily and I’m a digital transformation consultant with Hyperbots. Today we are speaking with Claudia Mejia about the complexities of sales and use tax compliance, focusing on the role of shipping to and shipping from addresses. So thank you so much for joining us, Claudia.

Claudia Mejia: Hi, Emily, thank you for having me.

Emily: In this discussion, Claudia, we’ll also talk about how AI can streamline tax compliance by automating address, detection, and rate applications. So the 1st question that I’d ask you is, could you start by explaining how the shipping address impacts sales and use tax calculations?

Claudia Mejia: Yeah, sure. So basically shipping to other departments and what is the calculation for the sales tax? Usually basically is determined where the goods are delivered, not necessarily where the seller is at. So in these cases, a system that there’s made not only the States, the county, and the city taxes for that transaction.

Emily: Got it. And how does the shipping from address impact sales tax in states that follow an origin-based approach?

Claudia Mejia: So there are the destination-based states. And in the United States, we also have origin-based states. There are about 12 states that are origin-based. And basically what that means is that the sales tax calculation is based on the origin of where the seller is at which creates simplification for the State. but it might not necessarily simplify the fact that when certain goods are shipped outside, the State also will follow the destination. Access rules. So there is a little bit of complexity in that as well.

Emily: Understood. So, Claudia, would you be able to provide examples of states that use destination-based versus origin-based sales, tax policies?

Claudia Mejia: So, for example, in New York, Florida, they use a destination base. So the calculations are done, based on where the chips are delivered to. And like I said, there are about 12 states that are origin-based, and some of them are Illinois, Arizona, Missouri, and Ohio. And then basically, they will calculate the rates, the tax rate based on the region within the state within the State. But, if they’re cheap outside it, they will follow the destination.

Emily: Understood. So how do the regulation and tax policies affect businesses operating across multiple states?

Claudia Mejia: Well, it creates a lot of complexity, right? And so when you have, and not only a provider that is in multiple states but also a let’s say that sales across the country. So there are a lot of setups that need to be done to make sure you follow compliance for those that need to follow origin-based personal destination, base. so systems have to be flexible to adapt to those rules. And I will say it’s complex. But if you have a good set of rules you’ll be able to manage. But there are other ways that you can do it more efficiently, more efficiently.

Emily: Got it. So what role does economic nexus play in determining sales, and tax obligation? And how exactly does it affect multi-state businesses?

Claudia Mejia: So economic nexus basically means that there are some obligations to collect tax based on the state, and also it is ruled by the threshold of the revenue. So, for example, if you sell to California and there is revenue over 500,000, then you would have to collect sales tax in the State of California, even though you are, let’s say, in an origin-based state. So those are other complications and other rules that you need to make sure that you adapt as you grow cells in another state.

Emily: Understood. And Claudia, how can AI help automate the detection of shipping to and shipping from addresses on the invoice?

Claudia Mejia: No. So I will use Oc NLP and natural language processing to basically read the invoices and repurchase orders. So when the AI reads, for example, the shipping to address or shipping from address, they will calculate the taxes automatically. And so, instead of always trying to make sure that all these rules are in the system, AI will automatically calculate.

Emily: Got it. And how does AI help ensure that the correct tax rate is applied, based on these different addresses?

Claudia Mejia: So you can have a database with these rules. And then AI can read the rules, read invoices, read the rules, and basically apply them right? But also the Llms will have information of those rules that can also just read it and apply it automatically. And kind of that’s the beauty of AI. You don’t have to have manual entries of these taxes all the time, or verification of these databases. Yeah, I can do it by itself pretty well.

Emily: Got it. So just out of curiosity. Can AI help businesses monitor and comply with economic nexus thresholds across the different States?

Claudia Mejia: Yes, so the beauty of AI is that it is proactive in the sense that if we understand that, or if we know that we have to comply with the economic nexus. That means that there are certain thresholds of revenue. We can set up those thresholds, and AI will know when those thresholds are coming up. and it can basically acknowledge proactively to make sure that the company registers and follows their rules and compliance for that. So, instead of a person always trying to figure out, where is my revenue? Which states it would be very complex. complex to do it, while AI does it proactively for you.

Emily: Understood also, Claudia, how can AI assist in automating the use of tax calculations for out-of-state purchases?

Claudia Mejia: Well, the same way that it does it. for the seller. It will work the other way around, right? And so it would. Let’s say that we have a purchase, and somebody the seller did not calculate the sales tax. Then it will flag the issue. It will tell you. Hey? You did not apply the sales tax. So it kind of is a self-assessment to make sure that you don’t have penalties or other audit compliance to follow and so that’s also the beauty of it.

Emily: Got it. And just one last question, Claudia, to summarize everything. What additional benefits can AI provide for sales and use tax compliance, especially during audits?

Claudia Mejia: Well, you want to make sure that your records are very sound right? And so AI will help flag inconsistencies. A flag error or missing sales tax. So if you have those setups you’ll be able to catch a lot of errors that maybe the human won’t be able to do in a day to day operations. and then your audits will work and will go faster. More efficient people will basically use their time on more important activities than just trying to follow transactions. Will read patterns and the reporting of the insights. It will be proactively telling you some important information about that.

Emily: Got it so thank you so much, Claudia, for sharing these insights on sales and use tax compliance. You know it’s pretty clear that leveraging AI can greatly simplify the complexities of multi-state tax obligation. and also sort of help. Businesses maintain compliance more effectively. So thank you so much for talking to us about such an imperative topic.

Claudia Mejia: No, thank you, Emily, very much appreciate it.