Cut Sales Tax Compliance Costs By 40%: A Shopify Merchant’s Guide to Kintsugi’s Sales Tax Automation vs. CPAs and Manual Method

Sales tax compliance is not easy, with many business owners spending hours or days to accomplish it. Unfortunately, many couldn't do it right, risking themselves to an expensive and time-consuming audit.

Fortunately, you do not have to go through those complicated and costly processes because sales tax automation is a thing. If you haven't heard about it or have come across it but are not very familiar with it, then you should take the time to understand how automation can change your sales tax compliance journey.

Fifty-two percent of the respondents in the same survey acknowledged that seamless sales tax automation solutions could change how they manage tax compliance.

Kintsugi can help you save money and time while keeping your Shopify business compliant because that's what we do best. You should focus on growing your business and leave the tax matter to us.

Understanding the Complexities of Sales Tax Using Manual Method

 

 

Sales tax compliance can be done manually. However, the process is more complex than you can imagine. In the next section, I'll give you an overview of how it works.

What Is Manual Sales Tax Compliance?

When you do your sales tax compliance manually, whether you do it yourself or pay an accountant to do it for you, you've got to go through the following processes.

1. Determine where you have a sales tax nexus.

You have to determine where you have an economic nexus and if your business operates in multiple states, this means that you have to compare your sales figures against state-specific nexus thresholds.  In most states, the economic nexus threshold is set at $100.000 in sales or 200 transactions annually. 

2. Register for a sales tax permit in relevant states.

You have to visit each state's Department of Revenue or Taxation website and provide your business details, Employer Identification Number (EIN), and estimated sales data. Once approved, you will receive a sales tax permit or license number, and you can start collecting taxes.

3. Collect sales tax from customers.

This is where it gets challenging because you have to understand the tax rates, which may vary in states and local jurisdictions. Also, you need to know the special rates applied to certain products or services. You also need to determine the products and services that are taxable, which may vary from state to state, and classify the tax rates accurately.

You must also determine if shipping and handling are taxable in the destination state and apply tax rules for discounts. You must consider all these things to ensure you use the correct tax rate.

Keep all the invoices and exemption certificates to track the sales tax collected. Doing so will help you during audits. Also, regularly reconcile sale records with bank statements and accounting ledgers.

4. Remit collected taxes to tax authorities.

Gather all the necessary documents to collect the information needed, like total sales within the reporting period, taxable sales, and the tax collected. Download the appropriate sales tax return forms from each state's tax authority website and fill them out carefully and accurately because wrong information or erroneous calculations can subject you to audit, and you won't like it.

Many states require or prefer electronic payments via their online portals. Or you can send checks payable to the appropriate tax authority if they allow it.

5. File sales tax returns.

You can file monthly, quarterly, or annually based on what the states assigned to your business. You can do online or paper filing, but the former is more convenient. So, use state e-filing systems if they are available. Make sure to submit the returns on or before the deadlines to avoid penalties.

When doing things manually, you have to keep yourself updated on tax law changes and update the process accordingly. For instance, if the tax rate changes, you should apply it because it will affect your calculations.

Hidden Costs Associated with Manual Compliance

 

 

Many business owners thought manual sales tax compliance was cheaper than sales tax automation software. However, there are hidden costs that many are not aware of.

1. Time-consuming

This is important to get the correct tax rate, which varies per state. Filing can also take several hours to complete, and when you operate in multiple states, you have to remember the different filing frequencies -- monthly, quarterly, and annually.

Detailed research is very important to ensure compliance because doing it wrong will subject you to penalties, charges, and audits, which can be expensive. So, you must take your time, which may take several hours weekly or monthly, depending on the size of your business and the complexity of your operations.

2. Labor cost

Due to sales tax complexity, many business owners hire experts like tax professionals or dedicated staff to manage it or offer ongoing training for their staff to be updated on the latest sales tax laws and compliance requirements. Both only elevate payroll expenses.

Additionally, time is money and time spent on manual compliance may detract you from focusing on growing your business. Also, staff bogged down with tax compliance tasks can't concentrate on their primary roles, affecting their productivity, which is another opportunity cost lost.

Apparently, manual sales tax compliance is more costly than it appears.

3. Higher risk of errors

Since sales tax compliance is done manually by humans, it is subject to human error. Applying incorrect tax rates and misclassification when categorizing products or services can affect the calculation.

Inaccurate filings could trigger an audit, which consumes time, money, and resources. Also, when the assigned person misses the deadline, it will lead to late fees and penalties. 

4. Can affect customer experience

Miscalculations of tax rates can lead to overcharging or undercharging customers, which may lead the latter to question your store's reputation and affect their trust in your store. 

Also, inaccurate calculations may lead to disputes and chargebacks. Resolving tax errors can be time-consuming and may damage your reputation, especially if the customers leave negative reviews.

The Impact on Shopify Merchants

Since Shopify merchants like you must collect and remit taxes when establishing an economic nexus, you must understand sales tax compliance by heart. Unfortunately, many sellers admit they struggle with it; some even share their horror stories online.

One said they started a Shopify business and were "confused asf about taxes." They tried to do their research but couldn't understand the materials they found online.

"Taxes suck, I'm not sure how to handle taxes like sales tax, because some states have it and others don't, and the Shopify help center page about US tax references wasn't the greatest," the Shopify seller said. "I couldn't understand a lot of what I was reading."

 

Another said, "Sales Tax is a nightmare." They had been selling on Shopify for four years, and they thought the platform collected and remitted sales tax, but that wasn't the case. They just learned they had liabilities in about six states the previous year.

"I've started charging my customers sales tax but the filing and registration is a nightmare. I've registered my business for a sales tax permit in 11 states and it's a nightmare!" the Shopify merchant wrote, adding that they decided to use a sales tax automation tool to help them with the process.

Considering these horrible stories from other Shopify merchants, it is understandable why doing your sales tax manually isn't easy. So, it's best to shift and switch to sales tax automation.

The Role of CPAs in Sales Tax Compliance

 

 

Certified public accountants (CPAs) can help business owners with sales tax compliance from filing and remittance to audit. However, they can’t do everything for you.

Services CPAs Offer

CPAs can assist you with sales tax registration. They can help you register your business to secure a permit or license when establishing a nexus. They will prepare all the forms and submit them to the tax authorities, facilitating legal compliance.

They also offer sales tax advisory and consulting services on nexus determination, product and services taxability, and tax liability minimization.

Most especially, they can also represent your business before tax authorities if you are subjected to a sales tax audit. They can help ensure the audit process proceeds well and mitigate potential penalties.

Benefits of Getting CPA Professional Services

Here are some of the advantages when you hire a CPA for sales tax compliance.

Expertise. They are knowledgeable and expert in the complex tax laws and regulations. 

Saves time. By handling compliance tasks to CPAs, who are better equipped to do the job, you will have more time to focus on your business' growth, such as marketing strategies.

Financial insights. They can offer tailored advice specific to your business needs and valuable insights into tax liabilities and ways to save compliance costs.

Risk mitigation. By getting professional help, you reduce the likelihood of errors and non-compliance penalties.

Peace of mind. They keep themselves updated with the ever-changing tax laws and regulations to keep you compliant and can help you resolve tax audit issues.

Limitations and Challenges

While CPAs can help you with your sales tax compliance, some limitations remain. Among the common challenges are primarily similar to the cost associated with manual compliance because they do the process manually.

Cost

One of the things you have to consider is cost.

CPAs typically charge hourly rates from $100 to $400 per hour, depending on the firm they work on. Junior CPAs or small firms' rates are around $100 to $200 per hour, while experienced CPAs or specialized firms charge between $200 to over $400 for complex tax matters.

Some also work on a retainer basis, where you have to pay upfront for their services. Monthly retainers can range from $500 to $5000 per month, depending on the scope of services. Some offer annual retainers for comprehensive services between $6,000 to $60,000.

Additionally, you might need to pay additional charges for multi-state filings, expedited services, additional consulting services, software licensing if they need it, and administrative fees for miscellaneous expenses like printing or mailing. The latter is in smaller amounts but can add up to a significant cost over time.

Human error

Although CPAs know what they do, they are still humans and prone to make mistakes. One of the challenges is the complex and ever-changing tax laws. CPAs need to be updated; otherwise, applying outdated information or misinterpreting tax codes could lead to incorrect sales tax calculations (underpayment or overpayment) and erroneous filing.

Also, there is a chance that they will make mistakes during data entry. Manually entering data into spreadsheets increases the risk of typographical errors or misaligned figures. Wrong product or service categorization can also result in incorrect tax rates being applied.

Time constraint

CPAs have multiple clients, so you can't expect them to be there for you 24/7. You might not even receive real-time updates from them.

Also, when they are too busy and have too much on their plate, especially during tax season, their work might be affected. They might miss some figures and end up with the wrong tax rates.

That’s why sales tax automation is the way to go when it comes to managing sales

How Kintsugi’s Sales Tax Automation Works?

Kintsugi aims to change how people think about sales tax by using artificial intelligence (AI) to automate the sales tax process. We can put your sales tax on autopilot in three minutes and in three simple steps -- (1) connect and monitor; (2) register and collect; (3) remit and file.

Kintsugi understands how difficult sales tax compliance is because we experienced it firsthand. We designed this sales tax automation tool to help business owners like you focus on what really matters -- growing your business.

Here's how Kintsugi can help you with your Shopify business.

Integration with Shopify

Kintsugi wants to make tax compliance a breeze for you, so we allow seamless integration with your existing ERP, HR and e-commerce platforms, including Shopify.

Integrating Kintsugi with Shopify is easy; you can do so from your Shopify account.

Here are some of the steps to do:

Installation from Shopify App Store

1. Log in to your Shopify admin panel and navigate the Shopify App Store.
2. Search for Kintsugi sales tax automation app.
3. Select "Add App" to begin the installation.
4. Grant the app permission to access your store's data, including orders, products, and customer information.

Setting Up Kintsugi Account

1. Create or log in to your Kintsugi account.
2. Input your business details, including your company name, address and tax identification numbers.
3. Specify the states or regions where your business has sales tax obligations.
4. Map your products to the correct tax codes based on product categories for accurate tax calculations.
5. Set up tax rules specific to your business.
6. Configure settings for tax-exempt customers or products.
7. Validate the customer's shipping address to apply the correct state and local tax rates.

Advantages of Kintsugi Sales Tax Automation Over CPAs and Manual Methods

 

 

Kintsugi offers several advantages over manual sales tax compliance. Here are some of them.

1. Automatic tax calculations

Kintsugi automatically applies the appropriate tax rates for different states or jurisdictions, so you do not need to keep yourself updated with the ever-changing tax laws. The sales tax is automatically calculated and added to the total check out of the customer's order.

2. Real-time updates on tax laws and rates for real-time compliance

One of the most challenging things when doing sales tax manually is keeping yourself abreast with the complex and ever-changing sales tax. Kintsugi's intelligent system is always up to date, so rest assured that you are always compliant.

3. Automated filing and remittance

Kintsugi covers end-to-end sales tax compliance for your business. You can use our tool for nexus determination, tax calculations, registrations, filings and more. Most importantly, with our tool, you can automate your filing and remittance, so you don't have to worry about it at all.

4. Saves cost

Yes, automating sales tax can cut the cost spent on compliance significantly.

Per Andre Ripla [2], Green Leaf Landscaping (GLL) used a cloud-based AI tax solution. After six months, they noticed a 20% reduction in quarterly tax payments through better planning, a 30% increase in identified deductible expenses, and they enjoyed zero penalties for late or incorrect filings. GLL saved an estimated $30,000 in tax preparation fees annually, and its subscription to an AI tax solution represented a 600% ROI.

Global Tech Corporation (GTC), a multinational technology company, partnered with a tax technology provider using an AI-driven system in 2021. After 18 months of fine-tuning the system, they saved $15 million in tax compliance through better optimization strategies.

Kintsugi also offers five times ROI in the first year alone, assuming you have $1 million in sales and $70,000 tax in five states using our level 2 integrations. See the table below.

 

 

However, one should note that the figure and actual savings may vary, considering the cost-benefit analysis comparing the manual process and sales tax automation.

5. Time savings

Aside from cutting costs for tax compliance, businesses that turn to sales tax automation reported spending less time accomplishing the job. 

According to Kintsugi CEO Pujun Bhatnagar, "Achieving compliance is not an activity that is going to generate any revenue, but many businesses are spending hundreds of hours each year doing this work." Thus, you regain your power when you have recovered the time that was supposed to be spent on tax compliance. 

Kintsugi is designed to help you enjoy your precious time on things that matter more -- your business' growth.

 

 

6. Enhanced security and compliance

Kintsugi is also safe because the platform implements compliance measures that secure customer and financial data. In 2023, Kintsugi achieved SOC 2 Type 2 compliance, which guarantees how secure our system is.

SOC 2 (Service Organization Control 2) is an auditing procedure developed by the American Institute of Certified Public Accountants (AICPA). It ensures that service providers securely manage data to protect the interests and privacy of their clients. SOC 2 compliance is based on five "Trust Services Criteria" -- security, availability, processing integrity, confidentiality and privacy.

We made sure to keep our system SOC 2 compliant because we process financial transactions and personal information and we want to assure you that we are a trustworthy partner.

7. Minimizes human error

Kintsugi uses AI to automate the process seamlessly. With AI-assisted transaction uploads, you just upload the CSV files without manually adjusting them. The traditional method is error-prone and time-consuming.

Our system also has a built-in tool that automatically classifies your products and lets you approve them in one click for fast classifications. You will definitely spend less time and save yourself from confusion about how to classify your products or services, which is prone to human error.

8. 24/7 Customer Support

According to Salesforce [3], 80% of customers feel that the customer experience is as necessary as the product or service they pay for. Nearly half of them (46%) expect to receive a response to their inquiries faster than 4 hours, while 12% expect an answer within 15 minutes or less.

It isn't easy to receive an instant response from CPAs, especially when it's beyond their working hours. However, Kintsugi has dedicated Slack support that can connect you to our knowledgeable customer support or tax expert within minutes to answer your concerns.

Kintsugi Sales Tax Automation Is The Way To Go

   

Automation improves efficiency, so it is the way to go for sales tax compliance. By doing so, you will not just save time and money; you will also enjoy peace of mind because of accurate calculations and on-time filing, saving you from penalties, charges, and the risk of audits.

Kintsugi offers the best sales tax automation experience, so if you are considering an automation sales tax tool for your Shopify business, you should consider us.

So, book a demo now or sign up for free.

Sources

[1] Avalara survey. https://newsroom.avalara.com/2024-03-26-Avalara-Survey-Finds-Businesses-Are-Turning-to-Automation-to-Manage-Tax-on-Purchases

[2] Andre Ripla. https://www.linkedin.com/pulse/leveraging-ai-automated-tax-filing-compliance-andre-ripla-pgcert-raxpc

[3] Salesforce. https://www.salesforce.com/in/resources/research-reports/state-of-the-connected-customer/

[4] SuperOffice. https://www.superoffice.com/blog/response-times/