Tax Transformation is Integral to Broader Business Modernization

By Larry Mellon.

Tax transformation will play an outsized role for businesses in their broader technology modernization efforts, meaning that tax teams need to have a seat at the decision-making table and their voices heard.

Given the complexity of current regulations and looming compliance challenges, indirect tax groups must be advocates, promoting the benefits of overhauling tax systems and guiding organizations in their implementation efforts.

One way to show the value of investing in tax technology is through its ability to mitigate risk. Non-compliance and its associated risk of fines and/or penalties is the biggest exposure that indirect tax teams must guard against. Beyond that, a negative audit doesn’t look favorable to customers.

No company wants to find itself having to call a customer and admit that tax was miscalculated, and it needs to collect it after the fact. And if that customer accounts for a big portion of a company’s revenue, that kind of error could be a huge strategic risk.

Beyond the broad risk of non-compliance, a tax engine can help companies reduce the challenges that arise as organizations expand into new revenue streams and businesses opportunities, including:

• Entering new tax jurisdictions: Tax teams are usually familiar with the compliance requirements of the products and services they sell in their current jurisdictions. But when you’re moving into new geographies, keeping pace with unfamiliar, frequently changing tax rules and rates can be more challenging. 

• Managing sales tax exemption certificates: This is a substantial challenge—and one that frequently attracts attention from tax jurisdictions. Auditors often want to review exemption certificates and examine invoices to ensure the validity and applicability of exemptions that have been issued. 

• Business growth: Like nearly every other event in the business lifecycle, growth can generate tax risk. If a tax organization fails to monitor the business changes and the tax registration and determination implications of growth, compliance issues can follow. 

Once you have the ear of the C-suite and a bigger role in planning technology modernization, it’s important to understand the foundations of implementation. Well before it’s time to deploy a solution, tax and tech teams must assess their own needs and what kind of technology would address them.

There are several steps that indirect tax leaders can think through to provide valuable early insights to the larger digital transformation process while making a stronger case for tax technology upgrades to be included in these initiatives.

• Address the total tax lifecycle – Before implementing a tax engine or technology upgrade, it’s imperative that tax teams address and improve each phase of the indirect tax lifecycle within their businesses. This review process begins with discovery and continues through the technology implementation. The insights and knowledge generated through this process will ultimately help optimize technology investments.

• Understand your tax compliance requirements – Take inventory of where your company does business and where it plans to do business in the future. It’s important to ask questions like what tax jurisdictions the company might enter within the next few years and where products and services are being shipped to or consumed.

• Connect compliance and tax technology requirements to ERP – Completing the two steps above will ensure the discovery process yields actionable insights into the tax-related capabilities that should be included in the company’s broader tech transformation effort. By mapping indirect tax compliance requirements to ERP and tax automation functionality, the implementation team will be able to configure new systems to meet the organization’s tax needs.

• Ensure data access, accuracy and breadth – Another important step ahead of implementation is making sure that ERP systems and integrated tax engines have access to accurate and timely data, including customer invoices required from tax calculation, remittance and audit-defense. Tax determination hinges on this kind of access to information.

Indirect tax teams aren’t always the loudest in the room, but not listening to them would be a huge mistake. With more than 10,000 tax districts in the U.S. alone and state and local governments turning more and more to sales tax as a way to relieve strained budgets, compliance is getting more complex by the day.

In fact, Vertex’s 2023 Mid-Year Rates and Rules report found that new sales taxes and tax rate changes at the state, county, city and district levels jumped by 43% percent compared to the same time in 2022. That makes a total of 431 new sales taxes or rate changes so far this year.

To stay compliant, organizations must implement a tax technology transformation that meets their needs and goals. The risks of noncompliance—financially and reputationally—are too great to ignore.

Larry Mellon is tax director at Vertex Inc.