Ventana Research Analyst Perspectives

The worldwide market for software to manage indirect income taxes, which includes sales and use, goods and services (GST) and value-added taxes (VAT), has been growing because of recent compliance mandates, the growth of e-commerce as well as a desire to accelerate business processes by reducing friction in areas such as tax compliance, cutting administration costs and lowering risk. Vertex provides businesses with cloud-based software that manages indirect tax processes for midsize and larger companies, especially for those with complex tax profiles. Vertex enables local and worldwide compliance backed by its ongoing tax research that continually compiles tax rules for over 19,000 jurisdictions. Because links with core financials is an essential capability for organizations of any size, Vertex maintains pre-built integrations with the leading ERP and financial management systems. Cloud-based systems are now the norm to support teams that are geographically dispersed and enable hybrid work environments. Ventana Research asserts that by 2026, a majority of midsize and larger companies will have digitized their indirect tax compliance to ensure accuracy as jurisdictions step up audits to increase revenues.

Indirect tax challenges present themselves in different ways, depending on the country or jurisdiction. Some countries, like Brazil, India and the United States, have complex indirect tax regimes, which complicate calculations and record-keeping. For example, the tax charged on an item or invoice may be different depending on which side of the street the transaction is conducted, whether a tax holiday on a specific category of goods or service is in place, or whether the buyer is exempt from tax. E-commerce has further confounded the process because of the need to instantaneously calculate taxes owed on a transaction, since any significant delay might cause the buyer to abandon the purchase. Reflecting the rise in online retailing and the impact it had on state sales tax collections, the U.S. Supreme Court decision in South Dakota v. Wayfair (2018) overturned past precedents and allowed states for the first time to charge sales tax on out-of-state merchants, even when the seller has no physical presence in the buyer’s tax jurisdiction. At the same time, the trend to remote work has expanded organizations’ geographic footprint, which can have an impact on their tax reporting obligations. Shifting supply chains have exposed companies to new tax regimes with different reporting and remitting requirements. As a result, many companies with manual processes have found that they have to spend considerably more time on tax determination, compliance and reporting than they have in the past.

Value added tax (VAT), which in theory can be simpler to administer and comply with, is no less arcane because the formulary of taxes charged or waived can be equally complex, and the categorization of a specific good or service may be open to interpretation. A famous, “when is a cake a cookie” decision in the U.K. in 1991 is a case in point, as is a more recent one that deemed brownies as cakes and therefore free from VAT. Compliance with, and payment of, VAT has evolved recently with the introduction of various e-invoicing requirements that demand the immediate payment of taxes due, concurrent with the transaction rather than paid after the fact. Governments want to accelerate payment, reduce the need for, and cost of, audits and prevent fraud such as “VAT carousels” that siphon off revenue from the system. Ventana Research asserts that by 2026, two-thirds of companies will digitize indirect tax management to comply with increasing real-time filing mandates by governments.

To help companies cope with their indirect tax obligations, Vertex O Series software handles tax determination by identifying the jurisdiction(s) relevant to each item in a transaction and applying the required tax from a comprehensive worldwide database of rates. The software enables companies to centralize indirect tax management, linking the determination engine to multiple ERP and financial management applications to enhance control and increase visibility. The flexibility and automation provided by the software eliminates roadblocks that can delay adoption of new business models or geographic expansion. Its global reach allows companies to expand to almost any geography as well as support business-to-business or business-to-consumer e-commerce. The software can mold itself to an organization’s specific requirements that affect taxability rules, exemptions and sources of data. Those with subscription or recurring revenue business models can streamline tax calculations while ensuring accuracy even as quantities, types and locations continually change and evolve. Available address cleansing to ensure accurate and consistent location definition combined with precise jurisdiction assignment functions ensure the appropriate tax is assigned.

Vertex’s O Series Edge is designed to manage the tax calculation at the point-of-sale (either at a brick-and-mortar location or an e-commerce site), eliminating connectivity and latency issues to offer a continuous, high-performance, flexible and fully controlled tax determination process. Exemption management is a chore in jurisdictions where sales to exempt classes of buyers (such as retailers) applies. Vertex's Certificate Center manages these, ensuring that they are valid and always current. It also can produce automated, signature-ready tax return documents.

Outside of the U.S., the company’s Systax DFE offering automates the receipt, validation and management of e-invoices in Brazil to enable its customers to enhance compliance with that country's notoriously complex system by finding and validating invoices to prevent invoice fraud. In the European Union (EU), its Taxamo Assure offering manages the collection, filing and remittance of VAT or general sales tax. This enables businesses with sales to buyers in the EU to take advantage of the Import One Stop Shop regime, which facilitates VAT compliance on goods with a value of up to 150 euros and eliminates the need to register with the local authority, reducing administrative overhead and potentially cutting costs.

I recommend that organizations evaluate how they are handling their indirect tax management. Beyond the potential benefits from avoiding non-compliance or errors and their associated costs, they should consider the productivity gain and the positive impact this can have in hiring and retaining their accounting staff. Those engaged in e-commerce should consider whether their current approach is working well and where improvements can come from reducing friction in this channel. Companies that have subscription or recurrent revenue business models, or that are considering adding these sorts of offerings to their one-time sales approach, must evaluate how they handle the indirect tax implications. And those that have expanded internationally, or are planning to do so, must consider how to manage their tax processes and exposures. I also recommend that they consider Vertex to address those needs.

Regards,

Robert Kugel