The Process of Retail Sales Tax Compliance

The process of retail sales tax compliance has, for the longest time, been a highly complex, data-intensive, and resource-draining process.

Retailers on average spend 209 hours and $24,032 every month handling their indirect tax obligations, a figure that is hardly surprising given the 13,000+ sales and use tax jurisdictions in the US. Making matters worse, the tax rates change constantly.

However, the burgeoning use of ML and AI in tax compliance is promising to change all that. The implementation of these technologies is going to significantly disrupt the way sales tax is collected and remitted by automating and streamlining tasks, ranging from tax calculations to record management to reporting.

AI and ML are transforming retail sales tax compliance, automating tasks and reducing the time and cost burden for retailers handling complex and constantly changing tax obligations.

Striking Gold with ML and AI: The Perks of Indirect Tax Compliance Automation

Employing AI and ML for tax compliance can be a game-changer for retailers.

• Increased Accuracy in Tax Calculations

  Retail businesses can quickly and accurately make sales tax calculations with an AI-powered tax system that can automatically match the product with the relevant sales tax rates, jurisdictions, local currency exchange rates, and economic nexus thresholds. This is because AI is capable of pulling information instantaneously from documents, including exemption certificates, invoices, etc., to calculate the applicable indirect taxes.

  Intelligent sales tax prediction can be especially handy while making sales in new markets or after a revision in the sales tax, which is a frequent occurrence, as traditional methods involving the manual calculation of sales tax can cause errors that lead to audits or penalties for the business.

• Convenient Remittance and Reporting

  AI-powered retail tax systems can comprehensively review your financial data to identify potential tax deductions, credits, and exemptions, so you can maximize your savings. Having algorithms analyze the information and populate the forms for returns and registrations, considering the relevant tax laws, can save a lot of time and minimize filing errors. Owing to that, the company’s tax professionals can rid themselves of manual work and focus on reviewing the tax reports for accuracy.

• Powerful Analytics Capabilities

  One of the most time-consuming aspects of the tax process is tagging the products based on the applicable tax. Product taxability mapping, which includes understanding what is taxable in a specific jurisdiction and which of your products/ services require special treatment, is typically a manual process that AI systems are fast revolutionizing.

  Items can be categorized automatically based on pre-set rules and tagged for accurate and instantaneous sales tax calculations. Even if you have seemingly similar products with vastly different indirect tax implications, such as the physical copies of books and their e-book version, you can employ AI to tag and tax them without any confusion or manually checking the sales tax rates each time.

  Companies can even have their tax forecasted accurately using predictive analytics to be better prepared for filing and remitting their taxes. Notably, the AI can even make use of previous filings, tax regulations, etc., to quickly tell you how much refund you are eligible for, even for large transactions, saving you a massive amount during tax season.

• Exceptional Data Management

  Retail companies spend an inordinate amount of time classifying their information and documents, such as invoices, tax filings/ reports, the applicable tax rates on their products across jurisdictions, etc., so they can be easily accessible. Automating the process of classifying these large datasets with machine learning means the job gets done in time and allows the company to have high-quality data at its fingertips.

  Also, the algorithms can check the system to identify wrongly filed and classified tax-sensitive documents and save the company from penalties.

  The data classification can further come in handy when a retailer receives notices from tax regulators. Sometimes, it is an informational notice, but on other occasions, the business gets a notice that requires immediate action. Having a tax system that has AI capabilities will go a long way in identifying these notices and avoiding fines.

• Foolproof Fraud/Error Detection

  The management or the tax professionals, while reviewing a massive amount of tax-related data, may miss out on lapses in applying indirect taxes, either intentionally by employees or as a result of human error. The wrong tax could’ve been applied due to reasons, including a misunderstanding of the use tax, inability to keep up with the sales tax nexus laws, etc. There is also the slim possibility of employees tampering with the sales data to give the appearance of more sales or intentionally misrepresenting the value of tax exemptions. AI is well-equipped to comb through mountains of data to identify wherever the wrong tax rate has been applied to ensure that the company doesn’t experience any shocks while auditing.

Latest Advancements in Sales Tax Automation

One of the best examples of leveraging AI for retail tax compliance purposes is eBay’s implementation of smart classification for accurately gauging the sales tax on products sold on the platform. The company operated in multiple countries with different sales tax rates for the same item, which meant that even the sellers couldn’t correctly predict the applicable sales tax. So, the company worked on employing a neural network to make accurate predictions of the sales tax during checkout based on jurisdiction and item classification that could handle even the massive number of product listings on the site.

Software companies that have for long helped retailers automate sales tax calculation, collection, and filing have also jumped on the AI bandwagon. For instance, Avalara has released a ChatGPT-powered plugin that can integrate with various e-commerce platforms and provide precise sales tax calculations across jurisdictions. Meanwhile, TaxJar has released Emmet, which it has dubbed the “first sales tax artificial intelligence”. The AI tool was built to be able to evaluate retailers’ products to intelligently suggest the right product tax code.

Where AI in Sales Tax Compliance is Headed

Shortly, AI chatbots for tax compliance could be a reality. Tax professionals might no longer have to spend hours checking tax filing data; they can get the information in real time by conversing with a chatbot.

Additionally, AI systems could become sophisticated to the point where they help retailers automatically assign the tax code to different items and display accurate prices including the sales tax to people in different countries under varying jurisdictions and currencies. Due to this capability, the shoppers will have a seamless experience, and the retailers won’t have to worry about fluctuating tax codes or human error in applying indirect taxes.

Also, the integration of AI systems with SKUs (stock-keeping units) could potentially lead to the automatic calculation of tax and report generation parallelly with the movement of inventory.

Conclusion

The integration of Artificial Intelligence (AI) and Machine Learning (ML) into retail tax systems is reshaping the landscape of indirect tax compliance. Traditionally, handling the complexities of diverse tax jurisdictions has been a burdensome and error-prone task for retailers. However, with AI and ML, the process becomes streamlined and efficient. From accurate tax calculations and convenient remittance to powerful analytics capabilities and exceptional data management, these technologies offer a range of benefits. The ability to detect fraud and errors, along with the latest advancements exemplified by eBay's smart classification and innovative tools from software companies like Avalara and TaxJar, showcases the transformative potential of AI in the realm of retail tax systems. As we look to the future, the prospect of AI chatbots, automated tax code assignment, and seamless integration with inventory management systems hints at even more advanced and user-friendly developments in the field of sales tax compliance.