Complexities of American Taxation

Dmitry Kaglik

April 22, 2013

SAP

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I have written recently about the differences between the American Sales Tax system and the VAT-based system.

The schema of sales tax paymentAt first sight, the US seems to have very simple taxation: you only need to report to the tax authorities if you sell to an end-user or consume the goods yourself.

But still US taxation is considered as the most complex. Why? Let’s look into the details.

How many tax rates do Germany, UK or France have? Usually there are 2 rates: full and reduced rate, apart from zero-rated, non-taxable or half-taxable transactions, of course. These 2 rates are the same for all companies in the country, regardless where they are located: the same rate applies in Paris and Lyon, or in Berlin and Hamburg.

It is not the same in the US. Sales tax actually consists of three (some even say four) components: state, county and town. Each part of the equation can set its own rate. It means that the same bottle of wine can cost people different amounts in New York and in New Jersey, in Los Angeles and San Francisco. There are so many “tax jurisdictions” in the USA that it is impossible to make such a rigid system as SAP able to cope with them all.

On top of multiple jurisdictions come tax holidays. Each of the taxation authorities can announce tax holidays for its component of the sales tax.

It means that the actual tax rate charged on a sales deal depends on geography and on the date of sales transaction. Ough!


Do you think that covers all the complexities? Not so fast! In our technologically advanced world remote selling has become very widely used. In this case the seller and the buyer are in different tax jurisdictions. Which tax rate should be applied in this case? The correct answer is: None! Yes, remote selling transactions are not eligible for Sales Tax, unless… Yes, there is another condition! …Unless seller has a physical branch in the jurisdiction of buyer.

Can any information system (SAP) work properly in these conditions? Yes, if it does not have to calculate taxes. Here is the role of the specific type of software called “taxware”. SAP simply provides the details of a sales transaction (amount, date and geography such as state and ZIP code) to taxware and gets back the amount of Sales Tax (or Use Tax) to charge. In the case of retailers the task can even happen without SAP involvement at all: the POS system has to work out the tax rates. SAP only accepts the pre-calculated values.

Who will call the American taxation system simple now?

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