Sales and use tax dictionaries

Find out interesting insights with John Silverstein , VP of FP&A ,XR Extreme Reach

Moderated by Kate, Financial Technology Consultant at Hyperbots

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

Kate: Hello, everyone! I’m Kate. I’m a financial technology advisor here at Hyperbots today. I’m thrilled to have John Silverstein with me. Hey, John, how are you doing today?

John Silverstein: Good thanks for having me.

Kate: Thanks for joining us so a little bit about John. He is the Vice President of finance process and accounting at XR extreme reach. Today we will be discussing the pros and cons of various different tax dictionaries. So let’s jump right in.

John Silverstein: Alright!

Kate: So, coming to the 1st question. how do sales and use tax dictionaries benefit organizations, especially those operating across multiple jurisdictions.

John Silverstein: Yeah, so tax dictionaries are critical for any business that’s particularly operating across the different jurisdictions, particularly in the United States, where we have specific codes by zip code and even product categories are different. So if you’re in one jurisdiction and selling both services and products or different types of products, the tax on those products or services could be different. Or there may even be no tax on some of those items. For businesses operating across multiple States, you might. You have unique tax laws, they might be invaluable. This is invaluable for ensuring compliance and avoiding errors. So it’s really hard, without a tax dictionary to avoid errors, because you would be manually doing it, or looking it up as you do sales and things. So it’s very time intensive, and to be compliant. You really don’t know, because sometimes the areas on the tax are also quite gray, whether it’s taxable or not taxable, particularly when it comes to things like Sas. In certain States, there have been new rulings even this year where the law wasn’t changed, but the court has ruled differently on the tax law, saying that sas is a service versus, not a service, and things like that, or vice versa. So those things, if they change in the State, or there’s different cases. In order to maintain your compliance and stay up to date, you need to make sure that you have a tax dictionary. There’s also another example. Here, for instance, a company selling both children’s clothing and adult clothing might need to apply different tax rules if one is tax-exempt in certain States, while the other is not a tax dictionary automates these distinctions, and it helps reduce the manual errors of trying to make the process much more efficient, even though those things are very much alike. The tax sometimes, particularly with clothing. It gets pretty interesting since I was in that space at 1.2. Sometimes it’s based on the value of that clothing, on whether it’s taxable or not, because it’s considered luxury. Item versus not luxury. So there are things like that that you really without really understanding the laws of every State which is impossible. You really need these tax dictionaries set up.

Kate: Understood. so moving on. Can you describe some popular vendors of sales and use tax dictionaries, and how they differ in their offerings?

John Silverstein: Yeah, so there’s several vendors with tax dictionaries, and even in your erps and things there are either connectors or apps, or sometimes they have them themselves where their tax dictionaries are or they’re pulling those from some of these vendors alike. Avalara provides real-time tax updates that have over 12,000 tax codes that cover both location and product-specific taxability rules. Vertex is another popular choice that is known for its support of multi-state and international operations. There’s 1 source by Thomson Reuters. It’s ideal for businesses needing global compliance solutions. And then, lastly, Taxjar is simpler and often more affordable. And I see some of the smaller companies do sometimes look up their free service and stuff like that but that, again, if you’re doing a lot of business, it’s not very scalable. So you need to subscribe to one of the services and set up the actual dictionaries. so each vendor it’s a little bit different on the detail and customization and what you need from a setup standpoint. For instance, a business that only operates in a few States tax jar might be sufficient. Because you’re always selling very simple things. It’s products and you’re not mixed between different types of services and products. That can be a lot easier where a tax jar might make sense. If you get a multinational company and you need it, and you’re across all the States and everything and different municipalities and all that stuff. Then you need to be something with more comprehensive capabilities, like the avalar vertex. You also need to make sure the thing that I’ve run into in the past is really even with Avalar and vertex is your item list, and code has to be cleaned, and you have to categorize your items correctly, or make sure that you’re using a proper list to do that because it can also get you, even if you have the tax dictionary set up. If you have your products categorized wrong, or items in your NetSuite or whatever ERP you’re using incorrectly. it’s gonna apply the incorrect tax based on the wrong tax dictionary.

Kate: That was really insightful. So how important is real-time updating in these tax dictionaries? And what are some of the risks? If this isn’t maintained.

John Silverstein: Yeah. So the real-time updating of tax dictionaries is critical because it does change. It’s not something that’s been set in place 50 years ago, and you never have to look at it again. Unfortunately, things as I said earlier, even a case that goes through where a company gets sued in a specific state or something like that over-tax sales tax sales and use tax. Then you may now have to comply, too, because you’re next on the list, right? So you gotta make sure that you’re up to date on what’s going on with decisions and how they’re interpreting the law. So it is critical that you stay up to date because of the changes. The rates also change. So if you just set it like in QuickBooks, you can set a tax rate on a product and leave it there. But it’s stagnant. But if that rate changes next year we’re about to head into 2025. If you don’t know that the rate is going up to a different percentage and things, you’re gonna be miscalculating the tax rates also a local jurisdiction in Colorado. If it changes its rate for taxable services, a business would need to update that immediately to the correct rate Avalon vertex. They would keep that up to date and give you a real-time. Update and help you stay compliant without having to manually track the changes and missing updates can lead to financial reputational risks. I see this as well where your major vendors are collecting sales tax, and they’re you’re a reseller. And then all of a sudden, they’re like they had an audit or something, and they had to go in and change their tax rules. All of a sudden that impact is for the resellers and then all the customers and everybody all of a sudden got that increase, and it could be pretty substantial if you’re selling a service that might be over a hundred $1,000. That’s $10,000. Increase a 10% increase in some states. So you have to be very careful because of its reputation. It’s also the customers. And there’s also planning around the actual price that you pay, including taxes.

Kate: I couldn’t agree with you more, John, on this. So moving on, what unique challenges do mid-sized businesses face when using these sales and tax dictionaries?

John Silverstein: Yeah, the midsize businesses often face budget and resource constraints. And it’s you that doesn’t. If you think you’re simpler and you don’t. They can be pretty expensive for an alarm vertex, depending on how many items and transactions and things that you have how many states, and if you’re going for full service or not to where they’re doing the filings for you. So there are the licenses, and fees that can be prohibitive, and then it may not make sense if you’re just a midsize business and you don’t do a lot of business in a specific state or jurisdiction. So that’s where it’s hard to sometimes justify as a mid-size, as a large company, it doesn’t really make a difference. And it’s not gonna cost you as a percentage of sales and stuff like that to go in. It’s just gonna keep you compliant and make you have less labor on it. So that middle ground of where you put labor or headcount to manage versus purchasing a dictionary, making sure that you’re up to date with avalar or something like that, is the challenge, I think, of the midsize business. having set up Vertex’s address, and level jurisdiction data in an Erp system. You also have the implementation technical expertise. Sometimes it doesn’t integrate exactly because you have that data again, things like that may happen, or you need them to be set up. And you don’t have the consultant, or something like that for a setup. So those are the big things errors as well in that item setup. So things that go back to avalar are only as good as the data in your ERP or item list. So that can be the challenge for those solutions and its interpretation of what those items really are.

Kate: Understood. Could you explain how sales and use tax dictionaries handle product-specific taxability and why this is significant for businesses with diverse product offerings?

John Silverstein: Yeah, I kind of went into it a little bit earlier. But the product-specific taxability. It ensures that items within these different categories that I’ve alluded to are taxed accurately, based on those unique regulations so it could be even the cost of that product. So in some cases, you may want to sell a product for $99 versus a hundred dollars, just because it changes the tax implications in the US. So the other thing where you can get different tax treatment is grocery items might be exempt from tax in certain states. And it may not be all grocery items. Some things are considered luxury, and some things have added tax like, if you’re selling soda in some cities, even your tax could be different because of the help tax. They put on some of these items and things like that. So it’s critical again, that you understand that compliance there a sales and use tax dictionary will differentiate these. It applies the correct tax rule based on the product type, vertex, and avalara, for instance, they’ll both allow the item-specific configuration. So businesses selling both non-taxable groceries and taxable prepared meals can easily manage these distinctions. This is especially helpful, for retail or e-commerce companies, with the wide, ranging product catalogs. And sometimes you’re selling into a state versus the other pieces of the tax nexus, how that’s set up is, it’s based on the delivery location and all that as well.

Kate: I agree, I totally agree. moving on what are some cost-effective options for mid-sized businesses that may find the pricing of robust tax dictionaries prohibitive?

John Silverstein: The best answer for this is to understand how much effort you’re really doing on it today to understand the Roi and potentially implement Avalara things because you’ll find that you might have your controller in a midsize business or a smaller business spending 2030% of the Controller’s time on sales tax that may not make sense, and then you and then you’re also hiring, maybe an accounts payable clerk, and some other people that you may not have needed to hire. So it’s critical to understand. Number one is what you’re really spending on sales tax today. And can we relieve that and get rid of that 20 or 30%, or whatever the hours are doing filings and doing lookups and things like that on the different goods you’re selling, and every time you get a new jurisdiction on the setup and all that stuff. So that’s why you can’t understand the Roi until you understand what you’re already spending on it. So that’s number one. number 2 is you may want to initially use something like a tax jar or something like that to just get some integrations and to get some data you could use a tax advisor to have some suggestions. And if you’re in just standard jurisdictions, and not that many. You could be set up, and you could set up the tax and just make sure that you’re checking it on a manual basis regularly. Or you’re looking up and getting alerts for any changes. In those yourself versus having to use the software. It’s again. You can use cheaper tools and things like tax jars but you can do some manual processes and look up. So it’s available. There are alternatives. But understand what you’re really spending on it. And it may be wise because I’ve seen even many of the medium-sized businesses and things where it could be justified to use an avalar or something like that. And then you’re not dealing with fines and things, and it’s easier on the audit side if you do get questions on sales and use tax audit. So it’s you have to look at the risk and look at what you’re trying to do, and where your expansion and growth are expected as well cause that would all change. The amount of effort you’re gonna have to put into it.

Kate: Understood. So moving on to the next question, how do these tax dictionaries handle use tax? And is this an area where mid-sized businesses face specific challenges?

John Silverstein: Use tax applies to items bought tax-free, but used in a taxable manner, requiring precise tracking and configuration. So many tax dictionaries focus more on the sales tax than the use tax which can leave gaps for midsize businesses that need to do use tax compliance. For instance, a business might purchase office supplies tax-free. But then, oh, use tax when using them internally because they’re not reselling. And things like that. So that’s a little bit different where you need to again for complicate the complicates the tax law. In the US. At least. these setups are again vertex and Avalara can help with those features on use tax, but require custom, configurations, and resources to manage without the right resources. The midsize businesses may not check, and may face challenges in setting up and tracking these taxes accurately as well.

Kate: I agree with you. So coming to the last question for today, what role can AI and automation play in simplifying sales and use tax compliance for midsize businesses? Using these dictionaries.

John Silverstein: Yeah, I think a number of things are gonna happen as time goes on, I think, being compliant and the availability of sales and use tax tools. There’ll be other players that are using the AI components that are just avalara vertex. You know some of your traditional players. I also think that gives an opportunity for even your Erps and things like that. A lot of companies don’t wanna say that they use even avalar if you call them up and you have a question about it. Should we pay sales, tax or not? They don’t give tax advice. They tell you to talk to a tax accountant to go through it. So getting that advice, and at least the initial thought and some guidance from AI-generated can help. I also think, in automating some of those responses, you might have better access to what a Cpa is. Or somebody else might say, and that also enables them to reach out. I think, more people and more companies, and have other subscriptions to be up-to-date monitoring and flagging. These as well can help. Hyperbots, for instance, too. That uses avalar and other dictionaries. Can you actually look at multiple dictionaries and things like that and understand what the differences are and how to make sure that you’re compliant? So using AI to streamline sales tax verification, too. on the vendor side. So you’re going to see that your customers are also verifying should they pay sales tax or not. So I think you’re going to get a lot more questions as AI can start to trigger. If they’re using hyperbots, they might trigger your customer actually to say. Hey, we’re tax exempt when you’re charging sales tax for the entire time, or we’re not supposed to be taxed in this jurisdiction or those types of things. So it’s gonna bring up some questions and things. But it’s gonna ultimately bring, I think, a much higher level of compliance. To the industry. And it’s also the availability and checks and balances on sales and use tax. I think we’re all gonna be better and easier and more efficient on this. because you’ll be able to get like. for instance, a little more detail on the hyperbots is that it can automatically extract the sources and destinations from the invoices and pos which is sometimes not compliant with what your addresses are stored in your ERP. So get those in line, and things, too, can help you with sales and use tax and give you decisions on where you should ship and how to use things and stuff like that, and even set up, you know, to make some decisions around that classified line item tax categories and use the most appropriate tax dictionary to verify the tax automatically. You may want to integrate these dictionaries into their ERPs and things like that. So you’ll get a lot again, it goes down to compliance speed. And I think it’s ultimately going to save us money and time. Additionally, it can recognize patterns in tax application errors and suggest corrections. So AI can. you know, help you with on that end, to minimize those risks that we talked about earlier? Improving accuracy. It also can help, the midsize business, to maintain compliance with con without, like constant manual oversight, like checking rates and exporting data, and then doing lookups versus these dictionaries and things like that. And both when you’re purchasing items, and when you’re selling items, you can be a lot more compliant.

Kate: That was really insightful. Thank you so much, John, today for joining us. We have reached almost the end of our discussion today. Thank you so much for sharing your insights on the pros and cons of different tax dictionaries with our listeners, whether you are an accountant, a tax attorney, or just someone with a passion for decoding tax jargon. We hope this discussion has given you valuable food for thought. Remember, the key is finding the right balance between comprehensiveness, clarity, and usability for your unique needs. Thanks for tuning in and a big thanks again to John for joining us today. Thank you, John.

John Silverstein: Have a good day.