Excise tax data continuity: How multiple systems endangered tax data integrity

Long gone are the days when product costs didn’t cloak government-imposed taxes, when purchase transactions were truly between two parties: the buyer and the seller. You may purchase my pig for seven of your chickens. The price tag was transparent. Generally, there were no indirect taxes or charges, and you knew what you were paying and for what. 

Then the tax man came and complicated matters. Over the centuries, tax authorities have engineered a twisting, turning labyrinth of regulations and taxes in support of commerce. Though commerce has become more complex, so too have the systems on which we depend to operate our ongoing concerns. The absolute key to effectively managing a company lies in a sound understanding of the data, and as we grow, the continuity of that data becomes more critical.  Tax data continuity is one of the most vital areas.

As businesses grow, they often expand their business model. These advancements can usher in complexities and sometimes challenge the capabilities of their legacy solutions to handle all their needs — including their tax management.

Tax compliance issues can pose some of the most complex challenges for companies. In response to these pain points, businesses often add supplemental solutions and work-arounds, using multiple systems to calculate their indirect taxes. This might look like a combination of automated third-party solutions, embedded functionality in transactional systems, and manual calculation to fill gaps. But multiple systems can carry multiple variables that translate to a lack of tax data continuity.

To operate a transactional system successfully, a company needs accurate master data. The truest axiom for clean data — the “golden rule” — is to minimize translation or transfers. When you limit the transfer of master data, you mitigate the risk of distorting calculations.  

But many organizations use multiple systems to calculate their taxes, which usually requires transfer of master data when the time comes to calculate and file — not to mention the time and resources to gather and consolidate the tax data. All this probing and movement can spawn redundant or missing data, incompatible formats — loss of data integrity.

Defective data leads to defective decisions. Bad data can also debilitate an organization’s ability to accurately report tax activity, leading to penalties and interest and auditing scrutiny. Once an auditor has assessed a company, the likelihood of continued scrutiny increases.

Additionally, many enterprise resource planning (ERP) systems that provide rudimentary tax calculation capability have historically only focused on sales and use taxes and provide little to no support for excise calculations. This approach tends to focus on automation for the volume of transactions and not on the total tax liability a company may face. An organization that deals in excisable products will typically have a higher total tax liability because of excise taxes — compared to the tax liability generated through sales and use taxes. As a result, many organizations develop disparate custom solutions to address their tax liabilities.

Recently, many companies have opted for data warehouse solutions in search of tax data continuity. However, this solution is only as good as the original design and rarely maintained at a level that ensures ongoing continuity. As an organization grows, some data warehousing solutions need to be modified — a challenge when trying to keep pace with constantly changing tax regulations. Established systems for tax automation have become fractured.

Data integrity has been a challenge as organizations grow and technology advances. Organizations should strive to keep systems and data current and base decisions on a single version of the truth to ensure transactional accuracy.

With the adoption of cloud technology, we can now mitigate data continuity risks. Cloud technology provides a solution to limit the transfer of master data by leveraging the original source, thus diminishing the risk of corruption. We can now leverage cloud-based multitax systems that provide continuity of tax data and, most importantly, a single version of the truth to support critical tax decisions.

Get more information on combined excise and sales tax solutions at Avalara AvaTax Excise. You can also schedule a time to talk to our team for personalized help.