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8/14/2019 White Paper - Next Generation of Sales Tax Solutions
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INTRODUCTIONOne of the more commonly recurring
incorrect perceptions in running online
related businesses is the notion that sales
taxes are not due on Internet
transactions. It should be clear from the
outset that Yes, retailers are responsible
for sales taxes on Internet basedtransactions; Yes, retailers must provide
clear auditable tracking methods of their
transactions, through the entire life cycle
of the transaction; and No these
requirements are not relevant to large
businesses only, they pertain to retailers
of all categories and of all sizes.
The original misperception originates back
from a 1992 Supreme Court ruling,
known as the Quill case. The Quill casewas determined in the pre-Internet
arena, but was subsequently applied to
online transactions because of the
similarity in circumstances. In Quill, the
Supreme Court stated that it will not
enforce sales tax rules. One rationale for
the ruling was that of the undue burden.
In other words, because of the inherent
borderless nature of Internet transactions
each transaction has the potential of
being subject to any-one of the over
7,400
taxing jurisdictions in the U.S. alone. The
Supreme Court stated that tax systems
are so complex, and there are so many
jurisdictions, that it would be an undue
burden to require retailers to be familiar
with each and every jurisdiction, and
comply with all of the different rules andjurisdictions. The Court was very explicit
though to say that sales taxes do apply to
these transactions, the court merely
refused to enforce the rules.
Obviously, lack of compliance is quick to
follow failure of enforc ement. As a result
retailers have traditionally failed to
calculate, collect and pay sales taxes
owing on Internet transactions. Many
confused this lack of collection with the
Tax Moratorium Act that was enacted in
1998. The Moratorium Act has nothing to
do with Sales taxes. The Moratorium Act
merely stated that no new taxes could be
created on Internet transactions. This
Moratorium Act was enacted in response
to ideas that politicians started floating
for creating new types of taxes especially
for the Internet, such as Internet Access
tax or bit rate taxes. But the Tax
Moratorium Act was very explicit to
have no effect upon existing taxes,such as Sales taxes. States did notenforce Sales taxes for much morepractical reasons: there just was notenough activity taking place on theInternet the dollars were simply not
there.
Retailers have
traditionally failed to
calculate, collect and
pay sales taxes
In the last two years both these
variables have completely changed.There is much activity taking place.In fact, studies are showing thatnearly $20B will be left on the tablein 2005 as a result of uncollectedtaxes on Internet transaction.
State governments have also beenoperating in the red, and haveempowered their agencies to seeknew sources of revenue. They needto act, and act fast.
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To address these circumstances and
respond to the Quill ruling, statetaxing agencies banded together todraft and sign the Streamlined SalesTax Agreement, where emphasis isplaced upon rule uniformity andsimplification of compliance. Thestates hope that with this process inplace, Congress will pass legislationwhich will expand the long armcapabilities of the court system, toreach out to out-of state retailers.The SSTP came into effect on October
1st
, when a dozen states formallyratified rules reflecting those rulesrequired under the SSTP, withanother six states being in partialcompliance associate members.Nearly all other states have signedthe SSTP contract, but it will takethem some time until they fullyimplement the rules.
Sales tax compliance does not begin andend with the SSTP however. Current
Sales tax rules also apply to online
transactions. State taxing authoritiesare aggressive in enforcing existingrules, and not waiting for SSTP to come
into effect. Barnes-&-Nobles,
Borders.com and OfficeDepot found this
out the hard way via back-taxes,
interest and fines imposed upon them.
Thousands of consumers nationwide
were recently invoiced for taxes they
did not pay when purchasing cigarettes
through the Internet. Under Internet
Sales Tax Fairness rules, companies are
finding that they need to register andpay
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sales taxes if they want to sell to
state governments.Small companies, with revenue in the lowmillions, are being hit with audits andpenalties of tens of thousands of dollarsfor failure to collect taxes. Then there isthe offer that cannot be refused startcollecting now, and receive an amnestyfor failure to collect in the past.
The bottom line is that sales tax
compliance is a real issue, independent
of the SSTP. Retailers need to be aware
of this issue, and address it heads on. It
is not one of those situations that youcan beg forgiveness after the effect
you will owe penalties and fines for
failure to comply on a timely basis.
Fortunately, there are solutions that can
help you address this issue. In fact,
Next Generation Solutions that are
being introduced into the market
promise to make this a
painless process, providing a
simple, cheap, reliable,
accurate and effectivesolution that operates in a
completely automated
manner, so that business
owners can focus upon
generating business, rather
than on whether or not they
owe taxes, how much, when
and to whom.
The perfect Next Generation Solution
would be (i) hooked straight into your
transaction engine; (ii) provide the
information necessary to assure thatthe correct tax is being calculated; (iii)
save the transaction and tax data
for further reference; (iv) be hooked
into systems that will allow it to trackthe transaction through its life cycle; so
that (v) any changes made to the
transaction are reflected in the system;
(vi) on a periodic basis as may be
determined by statutes and regulations
compile the data necessary for filing;
(vii) generate a return and report
necessary for complying with statutory
filing requirements; (viii) make the
return available for review and approval
by the retailer; (viii) file the return
automatically and electronically straightinto the systems of the state taxing
agencies on the required date, helping
the retailer avoid fines, penalties and
interest associated with late filing; (ix)
obtain from the retailer funds necessary
for payment of tax proceeds; and (x)
pay the
taxes owing on a timely basis, applying
electronic funds transfer methods to
assure timely payment at the last
possible moment without incurring
penalties for late payment.
This paper is dedicated to providing
a review of the Next Generation Solutions, how
they provide comprehensive solutions to addressall sales & use tax requirements, and entirelyremove the burden of compliance and auditingfrom the retailer.
Why, and how, are the
Next Generation Tax Solutions
the True Compliance Tool?
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FIRST GENERATION SOLUTIONS FORTHE SALES TAX MARKET
A typical sales & use tax transaction can be broken down to different elements.
These include the following components:
1Tax determination . This element consists of being able to determine, in real time, what is the relevant jurisdiction thatgovernsthe transaction, drilling down through the rules of taxation of the given jurisdiction, figuring out the correct tax rate, andapplying it, to render an accurate tax calculation. The tricky part of this element is being able to perform these functions in realtime.
Transaction Tracking . Sales & use taxes are not determined just upon the tax calculation at the point of thetransaction. There are many events that can occur after the point of authorization which could impact the final taxesowing. For example did the product ship? (if it did not no taxes are owing); was part / all of the purchase returnedat some future date (if the product was returned no taxes are owing on the purchase); was the transaction subject tosome form of an exemption (if it was, was a certificate of exemption completed to substantiate eligibility for the
2exemption)? All these are events that can occur post transaction, but before the date for filing of the tax return.
3Filing of the Return . As with any form of taxation a form needs to be filed with the taxing agency, which provides all of thedata relevant to the specific taxes being filed. These include data pertaining to the identity of the retailer (who is performingthe filing); gross revenue; tax exemptions; returns and refunds; taxes owing; and to which jurisdiction (including localjurisdictions, such as counties, cities, and special local taxes (stadium, public transportation, etc).
Proceeds . The bottom line of any tax is that of the proceeds that are actually being remitted to the taxing jurisdiction.
These need to reflect the amounts owing, as specified in the tax return. While we oftentimes attach our check to the 4 tax form, the actions of filing ofthe return and paying the taxes owing are two distinct actions. Anyone who, in recent
years, has proceeded to electronically file their personal taxes can attest to this they file the return andseparately proceed to transfer taxes owing under some form of electronic funds transfer.
5Audit . The life cycle of a transaction, and the taxes owing upon it, does not end upon the successful filing of the taxreturn and
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ore
spond to a request for an audit, to reassure the taxing agency that indeed taxes were calculated correctly, were all accountedfor, and that the correct forms were filed, and proceeds paid in a timely manner. Audit standards require the retailer to maintaincomprehensive reports and trails of the entire life cycle of the transaction, to support and substantiate each decision and actionbetween initiating the transaction through the final payment of taxes.
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First generation technology solutions have beenaround for nearly twenty five years. These solutionstend to focus upon any one of these elements ofcompliance, and provide a solution for only one. Forexample, they might focus upon tax calculationfunctions or completing tax forms. They will typicallynot be able to provide a solution for multiple elementsof compliance without some sort of external support.
These can get to be quite sophisticated
For example, users of SMB financial programs are allfamiliar with the fact that these programs can printout their tax forms. However these programs do notconnect to the up-front element of the transaction. Inother words, standard financial programs do not havethe ability of connecting to a shopping cart, andprovide tax determination in real time when the
consumer is authorizing the transaction. In addition,these systems will typically not be able to performelectronic and automated filing of the tax return they will provide a hard copy of the printed form. Thisrequires the retailer to still sign the form (afterchecking the data); write the check; insert both intoan envelope and make sure they mail it in a timelyfashion.
Another example is that of tax calculation engines.While these can get to be quite sophisticated,following complex lines of logic and performing highlycomplex series of functions in real time, they arelimited in scope to their ability to perform taxcalculations alone. These systems will typically nothave much, if any memory required for tracking atransaction through its life cycle, and will require back-
end ERP systems to perform the other elements ofcompliance, such as performing tax filing oraddressing audit requirements. One should notconfuse the sophistication of such tax calculationengines, with their limited cross functional capabilities.
The retailer needs to perform these functions
Notwithstanding the complexity and sophistication ofthese tools, the fact that they cannot perform the full
scope of functions required for compliance means thatthe retailer needs to perform these functions. Eitherby way of creating bridges between differenttechnological solutions that were not intended ordesigned to talk with each other, or bridge themmanually. Any of these solutions means that FirstGeneration Tax Solutions do not solve the pain of taxcompliance. Inherently, they are more complicated touse, more expensive to implement and maintain,require much resources to operate and, will thereforetend to break more easily and frequently.
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NEXT GENERATION SOLUTION FORTHE SALES TAX MARKET
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Conversations with CEOs CFOs andany other c-level executive allindicate that these people areaware of sales & use tax issues thatface their company, how difficult itis to comply, and has heard horrorstories of audits, fines an penalties.
A survey of CFOs of smallcompanies found that they spend,on average, at least 2 hours per
sales tax return, per filing period.This number increases dramaticallyas the size of the company growsand revenue increases.
This presupposes that they havegood First Generation Solutions.Even with good First GenerationSolutions in place, companies of allsizes spend many employee workhours in making sure that data isprocessed accurately, andtransferred from one solution to
another. A survey of small businessmanagers found that they spend acouple of hours a day intransferring transaction and depositdata into their financial systems.
Larger companies were found tohave many FTEs dedicated to thesefunctions. This data processing isnecessary to address the back endfunctions of tax compliance reporting, filing and auditing.
This high level of involvement,
activity and knowledge is a strong
indicator that something is wrong with
the system. Are these people concerned
with how authorization is processed by
the financial institutions?; do they even
know who all the players are in a typical
transaction authorization process? No!
and neither should they. Business
executives should have to focus on
building their business, and not on
figuring out their response to the state
tax auditor, explaining why a software
developer does not know why a
business must distinguish between a
customer who purchased their
doughnut at the counter, or ordered it
while sitting at a table. Nor should they
be treated as common thieves because
they paid the correct taxes, just to the
wrong county.
Recently, Next Generation Solutions
have started to emerge into themarket. The goal of Next Generation
tax compliance solutions is to remove
the pain typically associated with tax
compliance, and, as a single source,
provide for a single solution that
addresses all the elements required
A survey of CFOs of small companies
found that they spend, on averagat least 2 hours per sales tax returper filing period.
for compliance. Next GenerationSolution are deigned to automateprocessing of repetitive and timeconsuming tasks, and eliminatingdata and system gaps. This is along winded way of stating thatNext Generation Solutions providefor a seamless solution, whichremoves the entire burden ofcompliance from the retailer. By
using a Next Generation solution,the retailer should be reassuredthat all their needs to addresscompliance are being taken care of,and they can focus upon their maingoal, that of generating business.
The importance of Next Generation
Solutions is best understood in light
of the sense of complacency
companies are lulled into when, as
modern businesses, they use
technologies to help management
work more efficiently. Managementtends to set a goal of figuring taxes on
transactions, and these First
Generation Solutions achieved that
goal. Management mistakenly
assumed that using some form of tax
solution achieves the goal of accuracy
and efficiency. The availability and
use of First Generation Tax Solutions
tends to lull the business owner to
believe that they have taken
sufficient steps to maximize efficiencies
and reduce liabilities.
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In fact, tax auditors will not forgive
a retailer for incorrect taxescalculated and paid, even if areliable First Generation Solutionwas in use and relied upon.
For many organizations, the use of
paper forms or First Generation Tax
Solutions may lead to millions of
dollars in increased costs each year,
hard and soft costs. Companies that
utilize Next Generation Solutions can
achieve significant benefits on many
levels. For example, they can reduce
costs of capturing data from onesystem and converting it to another;
improve accuracy and reliability of
information; cut down on costs
associated with maintaining complex
audit trails and responding to audit
requests; and achieve higher
consistency overall in information
generated and used by the systems
and management in their decision
making processes. It is especially
perplexing given that the end results of
First Generation and NextGeneration Solutions appear similar
both end with a tax return that is
filed with the taxing authority, and
taxes paid. However Next Generation
Solutions work on many different
levels, increasing the reliability and
reducing the overall cost
of the entire process.
For example,
First Generation Solutions that
generate tax forms, means
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that these forms need to be printed,
reviewed, signed, inserted into anenvelope, and mailed in a timely
manner. In addition to these hard costs,
there are soft costs, which are more
difficult to quantify. Forms engines
might save some time by eliminating
manual entries, however they do not
save time over fully automated
systems. For example, printed forms
require higher levels of review
maintenance and human intervention,
to distribute, complete, physically
manage, and store. The information inthe form has limited access and
visibility limited to those individuals
with actual access to the physical
document. A Next Generation Solution
should perform all of these tasks
electronically and automatically. By
automatically generating and
performing an e-filing on behalf of the
retailer, and storing the form in
information systems readily available to
the retailer, the Next Generation
overcomes all those deficienciesassociated with printed forms. The
retailer need not be concerned that
they have to activate the function
enough time in advance to
accommodate internal review and
approval processes as well as postal
delivery delays.
Printed Forms also do not indicate
incorrect or incomplete data until
physically reviewed. More concerning is
that printed forms can be modified
or changed
erroneously orintentionally, so that
even if the form
is generated electronically
from a First Generation Solution, there
is no guarantee that it will not be
changed, and filed with the incorrect
data. More concerning that the
correct return be filed with the incorrect
agency, or the incorrect form will be
filed any of which might automatically
trigger an audit. Electronic forms of
Next Generation Solutions have built-in,auditable, internal rules of logic that
prevent these types of errors and
events from occurring. In effect, the
systems receive all data directly from
the transaction engine and transaction
tracking engine, assuring the use of
only transaction data, without external
intervention, and that it is filed on time,
to the correct recipient. While Next
Generation Solutions will allow manual
bypasses, these are more difficult to
implement, and will always record andindicate not only what change was
made, but by whom, and when.
A reproducible, auditable trail is thetrue differentiator between FirstGeneration Form Filing tax solutionsand those of fully automated NextGeneration Tax Solutions.
Next Generation Tax Solutions are the
true sales and use tax compliance
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engines. The ability to determinethe accurate tax rate in real time,factoring complex issues such astransaction nexus where thetransaction takes place, andtaxability of the given product on aline by line item basis in that givennexus, is but one of the issues theengine needs to address. Anotherpoint of complexity is the ability toprovide transparent, valid audit
trails, providing documentation foreach and every decision pertainingto the transaction made at anygiven point of time during the life-cycle of the transaction. The NextGeneration Tax Solution provides aunified, single point of access, data-set that seamlessly integrates withall tax calculation, collection andpayment modules, rather thanrequiring different audit trails foreach of these steps, leaving to the
auditor the act of reconciling thesedifferent trails, hoping that thebenevolence of the auditor will leadto the desired results.
Next Generation Solutions should focus
upon flexibility, maintainability;
integration and reliability. Performing
only two or three of the functions
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associated with tax compliance,while admirable and more advancedthan what First GenerationSolutions typically provide, will stillnot achieve the goals of the NextGeneration Solution. The solutionneeds to perform all four of thefunctions under one package. TheNext Generation Solution should beflexible enough that it allows foradaptability across different
systems, allowing to address manydifferent needs of the retailers.
The solution needs toperform all four othe functions underone package.
In sum, the perfect Next Generation
Solution would be (i) hooked straight
into your transaction engine; (ii)
provide the information necessary to
assure that the correct tax is being
calculated; (iii) save the transaction
and tax data for further reference; (iv)
be hooked into systems that will allow it
to track the transaction through its life
cycle; so that (v) any changes made to
the transaction are reflected in the
system; (vi) on a periodic basis as may
be determined by statutes and
regulations compile the data
necessary for filing; (vii) generate a
return and report necessary for
complying with statutory filingrequirements; (viii) make the return
available for review and approval by the
retailer; (viii) file the return
automatically and electronically straight
into the systems of the state taxing
agencies on the required date, helping
the retailer avoid fines, penalties and
interest associated with late filing; (ix)
obtain from the retailer funds necessary
for payment of tax proceeds; and (x)
pay the taxes owing on a timely basis,
applying electronic funds transfermethods to assure timely payment at
the last possible moment without
incurring penalties for late payment.
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NEXT GENERATION SOLUTION WHAT FUNCTIONS SHOULD THEY PERFORMSo what should a retailer be looking for in a Next Generation solution? What type of functionality is it reasonableto expect that these new services provide? What can you reasonably demand of your technology provider?
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1 Single Solution. Sales tax compliance requiresmultipleoperations. Starting at the beginning figuring out what isthe relevant jurisdiction and rules, and calculating taxes in real
time. But it does not end
there what about the back end functions of compiling all of
the data, completing the tax return, filing the return and
sending in the proceeds? Why should these functions beperformed by three different software packages? A single
package should be required to provide a complete solution to
all of the se elements of compliance.
Easy Integration. Do you need to hire an army oftechnical professionals to figure out how to integrate
2 the solution, and hook it to your shopping cart /cash register? Obviously the answer should be no. There is noreason that the technology solution require more than a coupleof hours (if even that) in set-up, installation and
complete integration with your entire commercialenvironment.
3 Zero Maintenance. The problem about sales &usetaxes is that the rules change on an extremely frequentbasis. This means that First Generation solutions require
monthly updates and maintenance. When you factor inreceiving the updates (which are not free), integratingthem and updating the system this is a highly expensive
proposition. You should not be concerned that you will bepaying fines because someone failed to update the systems
at the beginning of the month. Next GenerationSolutions have automated updates so that you
can rest assured that your systems are up-to-date,calculating taxes based upon the most current rules.
Transaction Tracking. Transactions, by their verynature are dynamic creatures. Comparing a picture ofa sales transaction at the point of sale and at the pointof reporting your taxes will in all likelihood show many
4changes. Changes that could result from product returns, credits,
refunds, exemptions, discounts, and so forth. These changes haveto be reflected in the final count. Solutions that are dedicated to
tax calculation functions only do not provide this higher level of
transaction tacking. Next Generation
Solutions need to track this data to assure accurate reporting,making sure that you get credit where credit is due.
Audit Reports. Who is not afraid of Sarbanes-Oxley? Personal liability
attaches today for failure to track 5 data that your company shouldbe tracking. Relying
upon multiple solutions to store different elements oftransaction data creates a disjointed audit trail that will notpass muster. With a Next Generation Solution that tracks atransaction through its entire cycle you kill a second birdwith the same solution you automatically obtain a singleseamless audit trail for your SoX compliance needs.
Real Time Data. We are living in an information age.Information has to be available to the decision makersin real time so that decisions can be made instantly, in
reliance upon accurate information. Any delay in6
receiving information places your competitor with acompetitive advantage. Gone are the days where you cansit and wait for 12 hours from the time you submit a
request for information, and then spend 3 hours trying tofigure out what the report says. Data should be provided in
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ndeasytounde
rstandformats.It
should be intuitive, so that you do not need a degree instatistics and computer languages to analyze it.
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Automation of manual processes. If you havepeople sitting and manually performing technical
7 and repetitive tasks, you have an antiquatedsystem. The modern technical solution should automate
these tasks for you, and should be designed so that itcan automate any such task that it is not already pre-designed to perform. Even tasks that, until recently, youwere told cannot be automated.
8 Electron ic Filing. No system should require you toprint out your tax forms, sign the form, print out acheck, staple them together and put them in the
mail with enough time in advance to accommodate postaldelays. Your income taxes are being filed electronicallytoday on the last day of filing, without having to stand in
hour long lines at the postal office. Why not your salestax returns? The Next Generation Solution should handleback-end electronic filing, regardless of the state to whichfiling is taking place.
Fully redundant, high secure, highly scalablesolution. Do not compromise on the security of
the system would you agree to take payments9
from your customers in a non-secure environment?Reliability, security and the ability to handle any scope oftransaction should be fundamental to any tax compliancesystem you use. Do not trust the sales person on theirword they will typically not know what makes a systemsecure and reliable. Make sure that the system has
undergone extensive testing applying stringentrequirements, such as ISO 2000 or NIST.
Low Cost. All this is available in cost effective10 tools.You do not need to pay high fees for Next Generationtechnology solutions that provide all of
the above features. A good Next Generation solution is built
around scalability and automation, ease of use without
compromising upon quality, all of which mean that the costsassociated with using the solution are low, cost savings that a
sophisticated vendor will share with their customer base.
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SUMMARYSales & Use taxes are not bound to disappear they will stay
with us for as long as these taxes are an accepted method for
funding of government activity. State and local governments
will not allow an entire, substantive, stream of commerce
continue its commercial activity tax free, unless there is a
conscience decision that these transactions are to be managed
tax free. States are starting to come down with a heavy step to
enforce taxes in this environment.
Those who believe that the failure of local governments to
effectively collect taxes on Internet sales indicates that theInternet is a tax free haven, do not truly understand the online
environment. It is important to realize that true commercial
activity of substance on the Internet is a very new creature
less than five years old. Before 1999 - 2000, people were still
afraid to conduct commercial activity on the Internet it was
new, and people did not understand how the Internet operated.
Consumers were concerned to insert their credit card number
necessary to make purchases online. Till that time period, the
Internet was predominantly used as a marketing tool, web sites
were fancy brochures, which provided a telephone number for
the consumer to call in with their order.
That phenomena has changed in recent years, and with it, the
attitude of local governments in their approach towards
enforcement of sales tax rules. Governments cannot allow
billions of dollars to go uncollected under existing tax rules,
because that will nullify their ability to increase taxes in other
arenas. Accordingly, they have taken steps in recent years to
increase their enforcement efforts tactically and legislatively.
Such catch-up steps are typical of government authorities,
which are constantly running to catch-up with recent business
trends. The fact that they are only several years behind the
curve is a feather in the cap, showing that
they realize the importance of this arena.
In parallel to the increase in government enforcementactivities, technology providers are improving their abilityto meet the needs of retailers to balance between theseemingly conflicting interest of minimizing resourcesand focus upon compliance needs, without compromisingupon quality of compliance. The currently emerging NextGeneration Solutions are filling those needs. They areincreasing efficiencies, reducing human intervention in
the process, and leveraging upon seamless automatedprocesses to reduce cost. The automated processes arealso operating to increase reliability and accuracy, reducelead time necessary for filing and paying taxes, as well asaddressing the ever increasing requirements for seamlessand reliable audit trails. A reproducible, auditable trail isthe true difference between First Generation form fillingtax solutions and those of the Next Generation TaxSolutions. Next Generation Tax Solutions are the truesales and use tax compliance engines. They develop thedata; gather it from the transactions, and address allrequirements imposed by state and local governments,
including reporting, tax payment and transparentaccurate and reliable audit trails.
The bottom line though is that the burden is uponretailer to make their choice. Tax auditors aenforcing the rules with increasing vigilance, and dnot accept excuses for failure to collect and pay sal& use taxes on a timely basis.
If we paraphrase from the old adage: SELLER BEWARE.