How Microsoft Dynamics 365 and Avalara make sales tax easy

In this guest blog post, Avalara writer Brenda Connell explains how ecommerce creates a challenging sales tax environment for businesses of all sizes and how Avalara and Microsoft Dynamics 365 can help them stay compliant and avoid fines and penalties.

Sales tax used to be fairly simple. A business would sell a product or service at a physical location, then collect and remit sales tax in accordance with the laws of that jurisdiction. The reason a business did this was because it had nexus. A nexus is a connection to a jurisdiction that creates an obligation to collect sales tax.

In 2018, everything changed with a single court ruling. The case completely upended the entire U.S. sales tax landscape for businesses of all sizes, in almost every industry, and in every location. Businesses around the world are still feeling the effects of the U.S. Supreme Court’s ruling. South Dakota v. Wayfair, Inc.

The Evolution of Nexus – and Sales Tax

Before online sales began, and even after they became more common, nexus was based almost entirely on physical location: where a business had an office, store, or warehouse. Many online sales went untaxed for years, as it usually took time for laws to catch up with technology.

It was good for consumers, but not so good for states that were short on revenue. The Supreme Court gave those states a lifeline.

The Wayfair decision prompted states to create “economic nexus” laws, which give sellers the power to charge taxes on sales made to customers in the state, even if they are located across the country (or even in another country). Many of these laws set a limit on the number of in-state sales a seller can make per year, which can be as few as 200. Once they exceed that limit, they must comply with the sales tax laws of that jurisdiction.

Of course, 200 transactions is nothing to a large enterprise, but even a small business can easily reach that number. All it takes is 17 customers with a monthly software subscription to reach that number in a year.

Add it all up and the economic nexus laws mean that businesses that may have only had to manage sales taxes in a few states now have tax obligations in all 50 states. And that’s much harder to navigate.

Why it matters

If sales tax were the same in every state and jurisdiction, this wouldn’t be a problem, but it isn’t. There are over 13,000 different sales and use tax jurisdictions in the United States, each with their own rates and widely varying rules. For example, some states don’t tax digital products and streaming services, while others do. Some states don’t tax “food-like” nutritional supplements (e.g., meal replacement bars), but do tax supplements sold in pill form. Some jurisdictions have sales tax “holidays” where certain categories (e.g., school supplies) are exempt from sales tax at certain times of the year.

And these rates and rules change frequently (there were nearly 99,000 sales tax holiday rule updates in 2023 alone), so it’s nearly impossible to track everything manually. But it’s not an option. Sales tax audits can result in huge fines and penalties, and technology is helping states improve enforcement.

Below are some real-world examples of challenges faced by businesses. We will look at how these companies successfully addressed them later.

• Industrial Equipment Dealers: As economic nexus laws began to pass across the country, the company found itself out of compliance in several states. Before the Wayfair ruling, the company had managed its sales and use tax internally, since it only had to worry about one state. But since 2018, the company’s obligations have expanded significantly.

• Retailer: This long-established retailer, which had been in business for over 70 years, needed to modernize. While its multi-channel approach had been successful, the company’s systems were not yet ready for the new sales tax environment.

• Equipment Supplier: This global company, which supplies equipment to establishments that serve a variety of beverages, experienced the cost of noncompliance firsthand. After being audited by several states, it not only owed taxes but also slapped with hefty fines.

Rescue by automation

Tax compliance services have traditionally been limited to most ERPs, as many companies did not face complex sales tax issues prior to the Wayfair decision. (That’s not to say managing tax compliance was easy or fun, but it was certainly easier before 2018.)

However, Microsoft Dynamics 365 has been delivering an evolving set of integrated sales tax solutions for 20 years, thanks to our long-standing collaboration with Avalara, a leader in automated tax compliance and a Microsoft partner. This integration Helped users streamline management of their compliance obligations within Dynamics (ultimately: Dynamics 365).

After the Wayfair decision, Avalara worked with Microsoft to help Dynamics users understand what they need to do to navigate the new world of tax compliance. Here’s what we found: Microsoft Tax Calculation Service APIA flexible framework that provides frequent updates to keep you up to date with ever-changing tax policies and rates.

Tax solutions integrated with Dynamics are designed to not only meet today’s needs, but also evolve to meet tomorrow’s needs.

Powerful features and real results

This integration allows Dynamics users to easily automate tax compliance no matter how or where they sell, whether online or in person, domestically or internationally. Key features include:

• Registration, accounting and other basic sales tax tasks. Whether your company has obligations in a few jurisdictions or thousands, Avalara’s integrated solutions streamline end-to-end compliance across the entire process, including filing.
• Cross-border compliance. VAT and other international taxes, duties, and obligations make tax compliance more complex, but integrating Dynamics and Avalara can help you support global selling.
• Tracking Nexus thresholds. Avalara can alert companies when they approach economic nexus thresholds in various jurisdictions.
• Tax exemption management. Duty-free sales can be complicated. Sellers need to collect certificates from buyers, verify them, and keep them for audit purposes. Automation simplifies every step of the process.

Dynamics users who automate sales tax with Avalara enjoy a wide range of benefits, including:

• Improved accuracy. Rates and rules are always changing, but the Avalara system is frequently updated to reflect these changes.
• Risk reduction. Technology makes it easier for government agencies to find discrepancies between expected and collected tax revenues. In other words, audits are a big risk. Effectively managing compliance with automation can reduce the risk of fines (including penalties).
• Utilize resources more efficiently. Automation generally means that businesses need less manpower to manage compliance (which means more manpower can be allocated to more profitable initiatives).

Let’s revisit our previous real-world example. How did Dynamics 365 and Avalara help?

• Industrial Equipment Dealers: The company’s tax obligations expanded significantly after the Wayfair ruling, and the company wanted a solution that integrated with the Dynamics tools it was already using. Today, the company uses Avalara for sales tax calculations, returns, and other tasks, which one manager says saves a ton of time.
• Retailer: The company needed a modernized system, so the first step was to implement Dynamics 365. Then came Avalara AvaTax and Avalara Exemption Certificate Management. Now the company can easily meet the changing preferences of its customers. For example, when someone orders a gift from a retail store, the company can fulfill the gift from the warehouse, ship it somewhere else, and know that the tax will be applied correctly.
• Equipment Supplier: After a major fine following a state audit, the company decided to use Avalara within its existing Dynamics system. Not only did the next audit in the same state come back completely clean, but by automating the returns process, the company’s CFO saved four to five days of work each month.

Learn more about Avalara and Microsoft Dynamics 365

To learn how tax compliance automation can help your business: Schedule a demo today.