Estimating Sales Tax in the Quoting Process: Are you doing it right?

Written by Abby Humphries Abby Humphries | May 14, 2024 | Read Time: 3 mins

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Navigating the murky waters of sales tax regulations can feel like an impossible task for even the most seasoned Technology Service Provider.

Between juggling service contracts, managing client locations, and staying on top of ever-changing regulations, calculating and collecting sales tax can feel like an unnecessary obstacle in your day-to-day operations.

Many of you might be using a patchwork of solutions – spreadsheets, manual calculations, or even guesswork – to estimate taxes within the quoting process. This can be time-consuming, prone to errors, and ultimately put you at risk for penalties during an audit.

This blog will dive into the complexities of sales tax for TSPs, explore the challenges you face, the common (and often messy) ways you might be handling it now and discuss how our business operating system automates estimated sales tax calculations to streamline your quoting process.

Challenges in Estimating Sales Tax

woman calculating sales tax on big tax form with important tax terms and processes listed on the side

Sales tax is a levy imposed on the sale of certain goods and services. While some states exempt specific services, tech services may fall under taxable categories depending on the nature of your work. 

While navigating sales tax is essential for accurate collection and remittance, the process itself can be a maze. Let's break down some key terms and common situations you might encounter:

Economic Nexus

This refers to the level of activity a business has in a state that triggers a sales tax collection obligation. Even if you're not physically located in a state, exceeding the economic nexus threshold could require you to collect sales tax there.

Responsibility for Collection 

As a TSP, you're responsible for collecting sales tax on behalf of the government and remitting it properly. Failing to do so can result in penalties and interest charges.

Complexity of Manual Management 

Manually tracking sales tax can be a nightmare due to:

  • Varying Tax Rates: Rates differ by location, requiring constant updates to ensure accuracy.

  • "Ship-From" and "Ship-To": Depending on your service delivery model, determining the appropriate tax rate can be tricky.

  • Tangible vs. Digital Products: Taxability can differ between physical products (like hardware) and digital services (like software licenses).

  • Taxable vs. Non-Taxable Services: It’s important to distinguish between taxable services (like data recovery) and non-taxable ones (like IT consulting).

The Current State of Sales Tax Management for TSPs

sales tax process where payments are sent to the TSP on the left then processed and paid to the government on the right

If you're like most TSPs, you're probably familiar with the manual quote-by-quote sales tax calculation routine. This approach comes with a set of drawbacks that can slow you down and hurt your bottom line.

Here's why manually calculating sales tax on quotes might not be the best strategy: 

Increased Quote-to-Cash Time  

Manually figuring out sales tax rates for every quote adds unnecessary steps to your quote creation process, directly impacting your quote-to-cash time. Every minute spent calculating sales tax delays sending the quote and slows down the entire sales cycle.

Errors Happen (and Can Cost You) 

Manual calculations are prone to errors, especially when dealing with multiple locations and ever-changing tax rates. These mistakes can lead to compliance issues with tax authorities.

Inaccurate sales tax calculations can impact your profitability. Undercharging a client means lost revenue, while overcharging can lead to customer dissatisfaction and require awkward price corrections later.

The Goal: Automation 

Tech Service Providers face a major hurdle when it comes to adding estimated sales tax to quotes. Existing options are either expensive, incredibly time-consuming, or riddled with errors and potential compliance issues that arise from manual data entry. 

It's clear that manually managing sales tax, especially for businesses operating in multiple locations, is simply unsustainable. This is likely why you're looking for a better solution.

In an ideal world, wouldn't you be able to simply select your business locations and have estimated taxes automatically applied to each quote based on the customer's location?

Estimating Sales Tax with TechGrid

Minimalist version of TechGrid operating system showing a black toggle to turn on automated estimated sales tax

TechGrid for TSPs offers a user-friendly and automated solution for estimating sales tax within your quote workflow, providing you with:

Estimated Taxes for Your Business Footprint 

Turn on the estimated tax feature within the TechGrid platform and select the states where you have economic nexus, which essentially means you have a business presence that triggers a sales tax obligation. This initial setup allows TechGrid to determine which tax rates to apply. 

Granular Tax Control  

TechGrid empowers you to customize how specific items in your catalog are taxed. You can assign a unique tax code to each item or service, ensuring accurate tax calculations for your quotes. 

Automated Calculations within CPQ Engine  

Once you've activated the estimated tax feature, our CPQ engine takes over the heavy lifting. As you build quotes within the Sell workflow, TechGrid automatically calculates the estimated taxes for each item based on your predefined settings and the client's location. These tax rates are then clearly displayed and recorded on the quote itself. 

Accurate Pricing Adjustments 

TechGrid automatically adjusts the total quote amount based on the extended price of each item and the corresponding estimated taxes. This eliminates the need for manual adjustments and ensures your quotes reflect the accurate final cost for your clients. 

Estimated tax calculations don’t have to be a painful part of your quoting process.

Book a demo today to see TechGrid in action and experience what your business could look like on the grid.

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