What’s wrong with U.S. sales tax, and how to make it right with your Dynamics 365 Business Central / Dynamics NAV System

If your company is not based in the United States (or even if they are!) there are business mysteries behind banking and taxation that don’t exist in many other places and sometimes don’t seem to make a lot of sense. A lot of those requirements originate from state and federal level regulations. This blog series will uncover what those mysteries are and how to understand them as systems that can be easily managed with Microsoft Dynamics NAV and Dynamics 365 Business Central.

The system of sales tax for US-based companies can be incredibly complex. The reason they are collected is to allow state and local governments to collect tax to support public services. Since the regulation of sales tax is maintained at the state level instead of at the federal level, much like banking regulations, each state can (and does) have a different set of rules to follow. In an economic environment where many companies, especially those who sell online, are now obligated to collect and remit sales tax in many states instead of only a few, the burden of data maintenance, interaction with more customers related to sales tax, and higher workload for filing state level tax returns continues to increase.

At a high level, these are the considerations to be made when determining how to correctly configure, collect, and remit sales tax in Dynamics NAV and Dynamics 365 Business Central.

1. Does the company have nexus? This definition currently has two meanings. In about 10 states, the concept of physical nexus exists. This means that the company must have either employees or a brick-and-mortar store in the state in order to be required to collect and remit sales tax. In about 40 states, the concept of economic nexus exists. This means that the company must have a certain level of transactions or a certain level of revenue which is defined by each state in order to be required to collect and remit sales tax.
2. Is the customer the company is selling to tax-exempt? Oftentimes, manufacturers do not need to pay sales tax on raw materials, and schools, religious organizations, nonprofits, and government entities are also not required to pay sales tax. If a company is tax-exempt, they should provide a copy of their tax-exempt certificate at the time of purchase.
3. Is the product category tax-exempt? Many states have lists of products that are exempt from sales tax. This will typically be clothing, groceries, medicine, medical supplies, and industrial equipment. However, the rules can be and are different from state to state.

Using software like Dynamics NAV and Dynamics 365 Business Central can help with tracking all these rules. These are our recommended best practices for using this software to collect and remit sales tax correctly.

1. Use the Customer Card to determine tax liability. Since you will need to track total sales as well as taxable sales, you really do want to have customers marked as liable for tax and then manage any customer who is exempt by listing their tax certificate number correctly.
2. The first things auditors want when beginning a sales tax audit are copies of the tax certificates. Collecting these electronically inside your software will ensure they are available when needed.
3. Use the Item Card to store the correct item’s Tax Group. This will ensure products are identified at the correct level of taxation.
4. Lean heavily on the configuration of Tax Jurisdictions and Tax Areas to organize the correct combinations of State, County, City, and Special jurisdictions for calculation of the overall total amount of tax to be collected, as well as for the correct separate amounts to be remitted to each entity.
5. Understand the Tax Details area. This is the place where the correct rates are listed and is the most frequently updated area when rates change.

You may also decide that the sale tax situation at your company is sufficiently complex to require an add-on solution to maintain this complicated process. There are plenty of products out there available to manage this. Many have different levels of services including not just rate update services, but address validation, tax calculation and collection, and monthly and quarterly filing services. If you find you need more than a part-time person to manage sales tax for your company, you may find the return on investment of an add-on product worth the cost.

If you’d like some help with de-mystifying business processes and correct system setup related to US-based accounting practices, please get in contact with us to discuss how New View Strategies can help. We have specialists with deep accounting expertise in using Dynamics NAV and Dynamics 365 Business Central who can move quickly through the requirements for your company and establish clear and accurate processes to manage these complex business needs. 

Looking for more topics related to US-based accounting? Check out the rest of our related blogs at the links below.

Why is the U.S. still using paper checks and what to do about it (Part 1 of 3)

Why is the U.S. still using paper checks and what to do about it (Part 2 of 3)

Why is the U.S. still using paper checks and what to do about it (Part 3 of 3)

The good, the bad, and the ugly side of US bank reconciliations

Pay me now or pay me later: managing 1099s throughout the year

What’s wrong with U.S. sales tax and how to make it right with your ERP system

What is South Dakota vs. Wayfair and why should companies who sell online care?

O Canada! GST, HST, GIFI and other three- and four-letter words related to Canadian taxes