Moderated by Emily, Digital Transformation Consultant at Hyperbots
Emily: Hey, everyone, this is Emily, and I’m a digital transformation consultant with Hyperbots. Really pleased to have Dave Sackett on the call with me, who is the VP of finance at Persimmon Technologies. Thank you so much for joining us, Dave, today.
Dave Sackett: Yeah. Thanks. Emily.
Emily: So, Dave, the topic that we’d be discussing today is challenges with accurately categorizing line items for tax purposes. And I’d like to, you know, kick things off by asking what are the main challenges with accurately categorizing line items for tax purposes.
Dave Sackett: I’d say the primary challenge is that line items often lack sufficient description, making it difficult to determine the correct tax category. Sometimes only a part, number, or generic term is provided without a specific line. Items are determined to be taxable or not. So, for example, an invoice might just say hardware without further details, leaving ambiguity around. Whether it’s taxable. Hyperbots can address this with AI technology that identifies tax-relevant data based on limited descriptions or part numbers.
Emily: Got it. Now that you mentioned AI technology, Dave, how does Hyperbots AI manage to categorize items with limited descriptions like a part number, or you know, let’s say a generic term?
Dave Sackett: Yeah, no. AI technology is constantly advancing Hyperbots. AI uses machine learning and natural language processing to analyze context clues in the invoice. So, for example, if an invoice lists, only a part number Hyperbots can cross-reference it to an external database to identify its category. If the part number matches a known item. This standard, such as a standard hardware, component Hyperbots, categorizes it by leveraging its extensive database of past categorization, and this means the AI can leverage both internal information and external information to make that determination.
Emily: Got it. Can you also expand a little bit on how Hyperbots use context from the entire invoice or purchase order to improve categorization and accuracy?
Dave Sackett: Sure. Yeah, Hyperbots examine surrounding items on the invoice to establish the context of where that information is coming from. So, for example, if a line item says license. But then other items include the words software or support, the system infers that it relates to a digital project or service, guiding it to the right tax category. This context-driven approach helps categorize even vague terms by using information from related terms to form the complete picture. This is a newer AI technology that can help identify this and now be used in a way to help with categorization.
Emily: Understood. And what data sources do Hyperbots leverage to enrich limited lines? Item, descriptions.
Dave Sackett: Yep. Hyperbots enrich data by tapping into prior purchase history vendor records, public part databases, and other information available on similar items. So, for example, if AI encounters a generic part number from a vendor, it checks historical purchases or industry databases to identify its category, ensuring high accuracy in categorization. This approach minimizes the risk of errors due to incomplete descriptions.
Emily: Got it talking a little about compliance, Dave. So how do Hyperbots ensure compliance with state-specific tax requirements when categorizing items?
Dave Sackett: Yeah, Hyperbots integrates a comprehensive state-specific tax category database updating it continuously to reflect the tax changes in state laws. So, for example, if an AI system knows that software licenses might be taxed differently in California versus New York and applies the correct categorization based on the state requirements. This ensures compliance and eliminates the risk of applying incorrect tax rates across different jurisdictions. And if you were to be audited, there’d be that audit trail that AI determined the right tax based on the right methodology.
Emily: Understood. And what do you know, what data does Hyperbots rely on in order to achieve 100% accurate tax categorization?
Dave Sackett: To achieve high accuracy. Hyperbots rely on several key data points, detailed item descriptions, part numbers with historical records, vendor details, transaction history, and state-specific tax categories. So, for example, if it has a full description like a digital software license, it categorizes it quickly and accurately. When these details are combined, the AI ensures precise tax calculations for each line. Item.
Emily: Got it, Dave, can you talk a little more about it? You know, how does Hyperbots’ proprietary technology continuously improve its categorization? Accuracy.
Dave Sackett: Yeah, Hyperbots. AI incorporates feedback from past categorization corrections to improve its future performance. If AI categorizes the line it’s later adjusted by the user. Hyperbot learns from this adjustment and applies new knowledge going forward. This is reinforcement learning that ensures that the AI constantly evolves adapting it to changes in product offerings, tax rules, or categorization standards. So the more you use Hyperbots, AI, the more it learns, the better it is to do its job with the correct training.
Emily: Understood. And just one last question, in order to summarize everything right? Can you summarize the primary benefits of using Hyperbots? Proprietary technology for line item tax categorization.
Dave Sackett: Sure Hyperbots provides a fully automated, accurate categorization solution that minimizes manual intervention and ensures compliance with state-specific rules. For example, by using context, clues, and part numbers. Hyperbots can categorize items accurately, even with minimal descriptions, saving time and reducing errors, it continuously learns the capability further, improving accuracy, and making it a scalable solution for high transaction volumes across multiple locations. So that automation of the tax categorization is going to save time and by improving accuracy that also saves time.
Emily: Got it. Thank you so much, Dave, for you know, expanding more on Hyperbots and talking through the challenges with accurately categorizing line items for tax purposes. It was a truly insightful discussion. So thank you so much for being here.
Dave Sackett: Yeah, thanks, Emily. Great to be here
Moderated by Emily, Digital Transformation Consultant at Hyperbots
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.
Moderated by Sherry, Financial Technology Consultant at Hyperbots
Sherry: Hello, and welcome to all our viewers on CFO Insights. I am Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have Shaun Walker here with me, who is a seasoned internal audit leader with a wealth of experience in driving risk management, compliance, and governance initiatives across diverse industries. Thank you so much for joining us today, Shaun. Today we’ll be talking about a very niche topic, which is Alabama sales and use tax compliance. To get us started, Shaun, could you just provide us with an overview of Alabama State sales and use tax rates? And how do these rates differ across goods and services?
Shaun Walker: Sure. So I’ll say that the general rate is 4% for most goods, like clothing, electronics, and general merchandise. Certain rules have differences for specific industries. For example, automotive vehicles are locked in at a 2% rate. Farm machinery and manufacturing equipment are at a 1.5% rate, and grocery items are reduced to a 3% rate versus 4%.
Sherry: To dive deeper into the topic, could you also discuss some of the jurisdictions in Alabama with notably high or low tax rates? And how does this affect businesses?
Shaun Walker: Different local jurisdictions set different sales tax rates. For example, Arab, Alabama, has one of the highest tax rates at 12.5%, whereas East Florence, Alabama, has a relatively low tax rate of about 5.5%. For businesses, this variation means applying the correct rate depending on the sale location. If we don’t, it can lead to noncompliance.
Sherry: And how often do Alabama’s sales and use tax rates change? And how do businesses keep up with these updates?
Shaun Walker: The rates can change several times a year, particularly at the local level. For example, in February 2024, Clay County increased its rate from 6% to 10%. Statewide changes, such as the recent reduction in groceries, also occur but less frequently. The way that businesses keep up is by relying on third-party tax compliance solutions or government resources. Updating systems to reflect new rates requires constant vigilance, which can be challenging for small and mid-sized businesses without any type of automated solution.
Sherry: What are some of the primary resources available to businesses to stay informed about sales and use tax changes in Alabama?
Shaun Walker: There are three main resources. First is the Alabama Department of Revenue—that’s the primary source. Then there are sales tax rate lookup tools provided by Avalara, which help businesses quickly access rates based on addresses. Third, there are websites like salestaxhandbook.com that provide a detailed breakdown and change alerts.
Sherry: What challenges do companies face when managing compliance with Alabama’s sales and use tax rules? Could you share some examples?
Shaun Walker: A few challenges stand out. One would be the complexity of tax rates—variations in rates based on locality can be confusing, especially for businesses selling across multiple jurisdictions. The frequency of rate changes makes it difficult to stay up to date because they can change multiple times per year. Determining taxability is another challenge. Not all items or services are taxed, so companies need to correctly categorize products. A common issue is misclassifying professional services, which are generally exempt.
Sherry: How can artificial intelligence help businesses manage sales and use tax compliance more efficiently?
Shaun Walker: One way is by automating tax rate updates. AI-driven systems can automatically update tax rates across jurisdictions, ensuring real-time compliance. AI can also analyze transactions to determine taxability, helping reduce errors in tax applications. Lastly, continuous monitoring of legislative changes and automatic adjustments to tax settings can be facilitated through AI.
Sherry: Additionally, how can AI support companies during audits for sales and use tax compliance?
Shaun Walker: There are two main ways. First is document retrieval. AI systems can quickly retrieve invoices, tax records, and supporting documentation, saving time and reducing stress. The second is error detection. AI can review historical transactions to identify discrepancies, such as applying an incorrect tax rate.
Sherry: What do you see as the future role of AI in handling Alabama sales and use tax compliance?
Shaun Walker: AI’s role will expand from compliance management to strategic planning. AI can forecast the impact of tax rate changes on company revenue by analyzing historical data and identifying sales trends in high-tax areas. It can also enhance reporting by providing real-time compliance dashboards, giving finance teams immediate insights into tax liabilities. Lastly, AI can send proactive compliance alerts, notifying companies of pending legislative changes and their potential impact on tax compliance.
Sherry: Thank you so much, Shaun, for sharing your insights on the topic. Your expertise provides valuable guidance for organizations aiming to optimize their financial operations.
Shaun Walker: Absolutely. Thanks for having me.
Moderated by Emily, Digital Transformation Consultant at Hyperbots
Emily: Hi, everyone. This is Emily and I’m a digital transformation consultant at hyperbots Inc. Today I’m very happy to have John on the call with me, who is the VP of FP&A, at XR Extreme Reach. So thank you so much, John, for joining us.
John Silverstein: No problem.
Emily: The topic we’d be discussing today is GL codes and debit or credit entries for vendor invoices, and I’d want to kick it off by asking the 1st question, which is John, can you explain what happens in the general ledger when a vendor invoice with multiple items is posted?
John Silverstein: Yeah, when a vendor invoice has multiple items, the GL, looks at those items based on their classification and where they should go from both a tax accounting account basis, department even, and those types of things. So it will go in and classify everything correctly based on the item code. So it’s not by the invoice or customer. That’s 1 thing to note because some people get confused when you look at one account of items, some items on the same invoice might go to tax lines versus office furniture versus computer equipment. So one example is that, like you get a. you have 2 items, office furniture, and computer equipment. One for the office furniture is $10,000. Your computer’s equipment is $5,000. Each of these items would be subject to different tax rates potentially and item, one would have a sales tax rate of 5%. The county tax sales of 2% item, 2 might have 6% and one and a half percent. The total invoice amount before the tax is $15,000. Then you will get office furniture. The item code will go to office furniture and to the account code for office furniture, and if it’s over your limits and everything, then it will capitalize that versus hitting your expense directly. And you’ll have that $10,000 with the $500 of sales, tax, and county tax 200 for a total of 700 hit the tax lines and then your computer equipment of 5,000, and the 6% 375 for 375 of taxes. So that’s it, will Calc directly based on those item codes. So it’s important to get those right.
Emily: Got it understood. So, John, what are the specific debit and credit entries that need to be recorded in order for you to know such, let me just do that again. So, John, what debit and credit entries need to be recorded in the GL for such an invoice?
John Silverstein: Yeah, for such an invoice. You need to debit entries. You’re gonna have furniture and fixtures because you’re creating those assets for $10,000, which would be a numbered code ideally, too, with maybe 1 5 0 0 as the account number and it will record that office furniture as an asset for the computer equipment. It’s over $5,000. So if that’s your threshold and things, too, it will record and purchase the computer and debit the computer equipment as an asset as well. Sales tax payable. We’ll debit $800 and the county sales tax debit 275 as well on the payable side, and then your credit entries would be the accounts payable for 16,075, which includes the full amount, plus the taxes.
Emily: Got it understood. So, John, why are these specific GL codes chosen? And what do they represent in the context of financial reporting?
John Silverstein: Yeah. So these GL codes are chosen based on the nature of the transaction. So because the item is furniture and fixtures, you’re going to hit that GL code 1,500, which represents the capital expenditures for office furniture. So by debiting this account, we can increase the value of our fixed assets on the balance sheet, and you would set up the schedule, too, for amortization as well. That we’ll talk about in another episode, I guess, or in conversation. But computer equipment assets would be 1 5, 1 0 similar to above. This code represents the capital expenditure for computer equipment. It debits and increases that fixed asset as well. So you can start amortizing, appropriately based on what that code amortization is. So if it’s 1 year, 3 years, 5 years, those types of things you can. It will also pick, based on the code that you put State sales, tax payable. These codes represent the liabilities for sales tax owed to the State and county tax authorities respectively. So you’ll debit these accounts temporarily reflecting the recognition of the tax liability until the payment is made and accounts payable. Same sort of thing, a liability account representing the total amount. the choice of these gl codes. It ensures proper classification and accurate financial reporting of these items.
Emily: Understood, understood, and just out of curiosity. How would the entries differ if this invoice was, let’s say, for operational expenses instead of capital items?
John Silverstein: Yeah. The main difference is that it would go directly to your expense. So it is generally a 6,200, 6,300, or whatever your numbering system is for the P. And L. Accounts. So you would hit office supplies and hit the $10,000 as an expense, and then the IT services. Would be $5,000. As well. So you would. It’s 2 different accounts, and your sales tax, though, would remain the same, and you would have to have the office supplies expense and its services, and then the State sales, tax payables, and county sales tax payables.
Emily: Got it. So, John, what challenges do organizations face when posting invoices with multiple items and varying tax rates? And how can they address these challenges?
John Silverstein: Yeah. So to address these challenges and to make sure that when you’re posting the invoices with multiple items of varying tax rates is making sure that you have matching tax rates. So different items may have different tax rates depending on the jurisdiction. It may even be if it’s a resale item, too. You have to. There are other rules in there, too, that you might be exempt from, so it can check those types of things as well. It also, if you’re paying the taxes versus itself tax versus, you’re paying the tax directly to the vendor, those are different coatings as well, so you have to make sure that you get all those correct. So complexity and matching tax rates are critical and it’s complex, particularly in the US. It’s by jurisdiction. Multiple GL codes also complicate the data entry, since it’s not just, that you don’t just purchase one item at a time in one invoice. That’s many items. So those have all different rules depending on it can be services and potentially items that you’re doing. And then they have different tax rates to address these challenges, too. You need to. You can use AI and machine learning to classify these invoice items, apply the correct rates, and make sure that it does capitalize when it’s supposed to be capitalized versus going to the expense rate which would also affect your income tax basis. So integrate with the tax engines for those jurisdictions. You can also have the validation checks. and that will ensure that you have accurate financials.
Emily: I’m doing one last question to summarize everything. John. Now that you mentioned AI and Ml, right, how can technology, particularly AI help in improving the accuracy and efficiency of gl entries for vendor invoices?
John Silverstein: AI can significantly enhance the accuracy of the Geo entries because you can have that data extracted from the invoice and make sure that you’re capturing. It has both items, codes, items, descriptions, all those things that can really check and make sure that you’re actively getting it through the Ocr. You can also use natural language processing techniques to reduce any manual data entry errors. You can also do smart classifications based on the AI models that can classify each item of the invoice to correct gl codes, so you can have it. Go through and look at the historical data plus predefined rules, and you can ensure that those items correctly classify the tax calculations with compliance. AI can automate the application of the correct tax rates and make sure that you’re applying those correctly as well. You also have detection of anomalies, that is, if there are unusual patterns or discrepancies in the invoice, AI can pick those up and alert the finance team for an extra review that can obviously enhance the quality of our financials and make sure that we’re accurately stating everything and get it can also speed up our time.
Emily: got it. Thank you so much. John, for being here with us and talking to us about GL codes and debit or credit entries for vendor invoices. It was really great having you, and the discussion was really insightful. So thank you so much.
John Silverstein: Great great to be here.
