In recent years enormous numbers of legislative changes to tax policy at the local, state, and international levels have dramatically affected the corporate tax function. We wanted to learn more about how automation and technology could help taxpayers deal with these changes, so we sat down with a true expert on this issue, Liz Armbruester, senior vice president of global compliance operations at Avalara Inc. Senior editor Michael Levin-Epstein conducted the interview in September.
Michael Levin-Epstein: In the last several years, there have been many changes in tax legislation around the world. What are some of the most important changes that you’ve witnessed, and what might be in store in the near future?
Liz Armbruester: I’ll start out by saying that tax complexity in recent years has not disappointed. It has always been complex and ever-changing, and the past year has continued in that fashion. I’d highlight economic nexus and marketplace facilitator laws. A couple things on that front are noteworthy. First, both Florida and Missouri adopted their remote sales tax legislation this year; they were the last two holdouts. Now every state with a general sales tax (or that will have one, in Missouri’s case beginning in 2023) has some form of remote tax law. If you recall, the Supreme Court decision that made remote sales possible happened in 2018, so here we are in 2021, and all states have just now created their version of remote sales tax. Marketplace facilitator laws are also now widespread.
Taking this view more globally, I’d highlight the European Union value-added tax reforms that became effective this year. Three major changes went into effect just a couple of months ago on July 1, including a simplified single VAT return model for the EU.
This is important when we think about the complexity of registration and filing across the twenty-seven member states for businesses selling into and across the EU. The introduction of the single VAT return represents an intentional trend toward simplification.
The second major change that went into effect on July 1 was the removal of VAT exemptions for low-value parcels. The change affects cross-border sellers importing consignments not exceeding €150 and requires that they charge import VAT.
The third piece of legislation now in effect is a deemed supplier obligation on marketplaces for certain merchant transactions. This change is like marketplace facilitator laws in the United States, where marketplaces are required to collect, report, and remit VAT on behalf of third-party sellers.
The last major category of change in the past year is specific to digital tax. More states have started their exploration and enactment of taxes on digital goods and services. One of the most prominent moves was in Maryland, which became the first state to tax digital advertising services.
In summary, there are three major changes in the last year: economic nexus and marketplace facilitator changes, EU VAT reforms, and then digital tax.
If we pivot and look forward, I think businesses should continue to expect more complexity, and that comes in the form of continued changes to economic nexus and marketplace facilitator rules in the United States. You might say, “Wait a minute: you just told me that the last two states just adopted remote sales tax legislation for economic nexus and marketplace facilitators, so why should we expect more change?”
If history is our guide, many of the states that have enacted these laws have changed them since they enacted them, often changing the total number of transactions or gross sales thresholds described in the remote seller laws. Several states have reduced those thresholds, and therefore businesses must be on the lookout for future changes to ensure they remain compliant.
The second thing to prepare for is the acceleration of tax collection and invoice transparency. Across the globe, authorities everywhere are looking to reduce tax fraud and collect the tax revenue they are due.
In the EU, the simplification of VAT reporting that we talked about earlier is one of the methods being used to combat fraud and improve the likelihood of timely and accurate tax remittance. Additionally, more countries are utilizing an e-invoicing model to gain visibility to expected tax due in either a pre- or post-clearance model. Leveraging a simplified VAT reporting model and e-invoicing technologies and process drives accurate and timely tax collection.
Last, businesses should plan for the continued evolution of digital and streaming taxes. States like Colorado, Kansas, Georgia, [and] Wyoming have either already adopted a tax on digital products and streaming services or they plan to do so. As is often the case, when one state acts, others quickly follow.
Levin-Epstein: Let’s follow up on your last point. I think EU members are particularly interested in digital tax initiatives. What advice would you give to businesses that have them to deal with this apparent upsurge in digital taxes?
Armbruester: There are two things to focus on. First, it’s important to find a trusted source of tax information, because in the tax world things can change very quickly. Sometimes it takes a long time to institute a change—I would go back to my example of Florida and Missouri adopting remote seller laws three years later—but sometimes it can happen quickly. Finding a trusted source of up-to-date information on things that you believe will impact your business is necessary.
By way of example, Avalara posts numerous blogs on this type of content, covering proposed legislative changes and new laws enacted and offering explanations of how those changes might impact businesses. Some companies utilize tax advisors or accounting practitioners, and they are excellent sources of that type of information as well.
“Tax automation doesn’t just help the big guys; it helps the little guys and everybody in between for a variety of reasons. When I think about tax compliance, I think about it as a journey that companies must go on every single period, whether that’s monthly, semiannually, or annually.”
Levin-Epstein: You spoke about increased efficiencies and better return on investment, but somebody must bring that about in organizations, and the question is, how can tax leaders drive that transformation across an organization?
Armbruester: That’s a great question, and I appreciate you asking. Finance functions in general should be a core part of any digital transformation strategy. Often, the tax function is overlooked; however, there are three reasons tax leaders can use to substantiate including tax automation into their overall digital strategy. First, going global creates new challenges. Digital transformation is making it possible for businesses of any size to sell around the world. They must be able to manage varying tax types, customs duties, and import taxes to sell cross-border efficiently.
Second, e-commerce is changing tax. As we discussed, from economic nexus in the US to digital tax initiatives across Europe, Asia, and South America, the rate at which tax must be collected and sent to authorities is increasing, along with added complexity. Last, tax sits on all transactions and systems. When selling through multiple channels, businesses are using numerous systems. Because tax sits on every transaction in some way, using tax technology can help increase visibility across systems and transactions. Armed with a great business justification, the tax leader should next consider the business partners they can rely on to make the transformation a reality. It’s challenging to do business transformation sometimes because even though there’s some amazing technology available today, choosing the right one for your business requires systems and integration knowledge that you, the tax leader, may not have. Critical partners to lean on include your IT and security teams as well as accounting and finance. Think about where that system is going to plug in and how does that integration make or drive additional benefit into your business. How will an integration enable growth as your business moves into new markets, into new product sets, etc., and where could you find value-added benefits through systems integration? Taking a team approach is an effective way to cover all bases.
In summary, understand your business justification and then, second, know and engage your partners and, last, be aware of your business’s digital transformation strategy, because if that strategy has already been laid out, you can easily align your automation outcomes to the overall company transformation strategy.
Adaptive Compliance Technology
Levin-Epstein: In terms of coming up with the right adaptive technology to effectuate this transformation, what would you say are the key benefits that are associated with automated tax compliance?
Armbruester: Tax automation doesn’t just help the big guys; it helps the little guys and everybody in between for a variety of reasons. When I think about tax compliance, I think about it as a journey that companies must go on every single period, whether that’s monthly, semiannually, or annually. When I think about automation, I think about it in terms of where can automation plug in to help with one-time events and those recurring activities that can save you time and money and that drive accuracy. Whether that’s tax calculations, or determining the validity of an exemption certificate, or with the preparation and filing of tax returns and the remittance of tax liability, automating any of those activities creates efficiency and accuracy while mitigating risk.
Some people I talk with only think about automation from the perspective of process efficiency and say, “Yes, I understand I can do this so much more efficiently. It’s going to save me time and money and be more accurate,” but when the tax automation solution is thought of from the perspective of customers at the point in time of either checkout or shipping, you realize there are customer satisfaction benefits from tax automation. Given the rise of e-commerce, many businesses are doing cross-border transactions, and if you are not getting the tax right at the point in time of the transaction, you may incur shipping delays or have a very frustrated customer being charged with tax due on delivery. This may drive up product returns and customer dissatisfaction.
Last, I would say—and I think this is one of the most important ones—in line with one of the core tenets in why you do digital transformation to begin with: Tax automation helps establish a foundation for business growth because it scales alongside your business as it evolves and grows.
Here’s a quick story to illustrate my point. I know of a small mom-and-pop shop in Washington state that pre-pandemic had one or two storefront locations. They shifted their selling model during the pandemic to online, their products grew in popularity, and they now have global customers and are doing ten times the volume that they were doing pre-COVID. Despite them being a small storefront-based business pre-pandemic, they had elected to implement a tax automation solution. That tax solution saved their bacon, as they now must comply with all of those remote seller laws in the US and their tax automation solution has scaled with them during an extremely rapid growth rate, and that’s a tremendous ROI for them.
Levin-Epstein: Thank you, Liz.