Sovos Compliance uses the GeoTAX solution to deliver tax compliance advice more accurately and quickly

Overview

Companies that sell products or services in several different tax jurisdictions face complex and diverse tax rules. For example, clothing retailers in Massachusetts must collect sales tax, but only on transactions above a certain threshold. In many states, food destined for home consumption is exempt from taxation, but food served in restaurants is taxable. In Phoenix, businesses may have different sales tax rates, depending on which side of the street they are on. And many ecommerce sales that cross state lines incur different tax rates than in-state transactions.

These types of tax complexities have driven many retailers, manufacturers and other firms to seek assistance from Sovos Compliance. The company’s software-as-a-service (SaaS) Intelligent Compliance Cloud helps clients understand all their tax obligations, regardless of where they choose to operate.

Challenge

The Intelligent Compliance Cloud automates the determination of taxes owed on each sales and purchase transaction initiated by a Sovos Compliance client. Sovos processes more than 1 billion 1099-reportable transactions per year on behalf of clients around the world.

Sovos systems analyze all the transaction information to first determine which taxing jurisdiction the transaction occurs in. The systems assign what it calls a “geocode” for that location.

The Intelligent Compliance Cloud then applies the appropriate tax rules for that jurisdiction based on what product is being purchased, where the product has come from, where it’s going, and who’s buying it, to calculate any sales and value-added taxes that the client owes.

“We then return that result to our customer,” says Pawel Smolarkiewicz, VP of product management for Sovos Compliance. “The seller adds that tax to its invoice, so that’s what it charges its customer. Making sure you have the right tax jurisdiction is obviously crucial in this process. You have to know the jurisdiction in order to apply all the appropriate tax rules and rates, and then be able to report and pay those taxes to the correct jurisdiction.”

The penalties for an organization that charges the wrong taxes can be serious. “If an audit reveals that a business has collected too little sales-and-use tax, the company will be on the hook for both the tax and, most likely, interest and penalties for getting it wrong,” Smolarkiewicz says. “On the flip side, if companies charge too much tax, they may face customer support issues and they can be sued.”

Previously, Sovos Compliance used a system that determined tax jurisdiction based on ZIP Codes. The location lookups weren’t precise enough to always return accurate tax information.

“In some states, like Colorado, jurisdictions overlap,” Smolarkiewicz explains. “A single ZIP Code may actually encompass three or four different tax jurisdictions. We, or our client, would have to determine which of the jurisdictions was appropriate for the transaction, but we often didn’t have enough detail to ensure a correct match.

“With the rise of ecommerce, and more vendors shipping products across jurisdictional lines, we needed a more detailed address lookup system that could pinpoint location to an individual rooftop.”