On any given day, small business owners must wear numerous hats – manager, marketer, salesperson, accountant, and more. So, in many cases, instead of focusing on running their business, small business owners are forced to become experts in areas that have no direct relation or benefit to their business. Despite all the roles small business owners fill each day, tax management is one that requires ample time, money, and resources to address effectively.
Sales tax management is an onerous process that requires small businesses to collect, report and remit the right amount of tax on every single transaction at the point of sale. If any collections are wrong or if payment is late, it can spell financial risk for small businesses. And, as more commerce and transactions have started to take place digitally, the complexity of managing sales tax has only increased.
In many instances, small businesses now operate in a multi-channel world. They have their storefronts, ecommerce sites, and sell on marketplaces – all of which require integrated systems to manage everything from payment collection to inventory management. Because modern small businesses are already powering most of the customer experience with technology, they stand to benefit from tax technology to offload the burden of compliance.
Here are some reasons why having tax automation that works with POS systems can help small businesses.
Sales tax requirements are constantly changing
In 2020, there were more than 40,000 tax rate and taxability changes in the U.S. and Canada alone. Because tax authorities are continually changing the rates and rules for how goods and services are taxed, small businesses face a significant time burden and increased risk of getting tax wrong if tracking changes manually.
The challenge of navigating the constantly changing sea of tax rates and rules gets even harder for small businesses that sell across multiple channels. Not only do small businesses need to know the sales tax rules for their physical stores, but also the implications of economic nexus laws, which require remote sellers to collect and pay sales taxes to the jurisdiction where a customer is based – with the caveat that the U.S. is comprised of more than 13,000 taxing jurisdictions.
Automation reduces the need for manual management
Keeping the sheer number of tax rules and how often they change in mind, it’s clear that manual sales tax management in a digital-first world is absurd. In fact, a recent study found that small businesses with three or fewer employees spend nearly $12,000 per month managing sales tax. Modern, digital tax tools eliminate the need to manually update tax rules and rates, as well as filing requirements, which can save small businesses time and money.
These automated tax solutions can also provide small businesses with added peace of mind. Integrated tax solutions at the point-of-sale automatically calculates the correct tax rate and set tax aside daily to help small businesses avoid misusing the collected tax revenue and minimize their audit risk. Beyond calculations, automation also provides value when it comes to tax returns. Technology can take the tax set aside and automatically prepare, file, and pay the tax owed to jurisdictions.
Manages tax as businesses grow
While many small business owners are focused on the here and now, growth is always something on their radar. Whether it’s expanding into new locations, channels, or product offerings, there are numerous ways small businesses can grow. However, small businesses must be prepared for the added obligations, including tax that come with expansion.
Let’s say a local coffee shop uses automation to collect and pay sales tax on sales made in their one physical location. When the time comes for the owners to open a new location in a neighboring state, their integrated tax solution can easily scale alongside their point-of-sale system to account for new rules and obligations. At the end of the day, tax can be a significant and costly barrier to growth, but the scalability of automation can help small businesses avoid those barriers and focus on growing their operations.
Small business owners have a myriad of distractions that are competing to take their focus off running their businesses, but tax shouldn’t be one. A government-mandated process that provides no value to businesses is prime for automation. Integrating tax technology at the point-of-sale takes the pain out of tax by alleviating the need for additional resources, saving time and money, and reducing the risk of exposure in the event of an audit. For small businesses looking to succeed in the digital age, applying technology to tax is no longer an option.
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Pete oversees operations as general manager of DAVO by Avalara. He has decades of experience leading technology teams for a variety of companies, including Quantrix and IDBS.