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INTRODUCTION
One of the more commonly recurring
incorrect perceptions in running online
related businesses is the notion that sales
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taxes are not due on Internet
transactions. It should be clear from the
outset that Yes, retailers are responsible
for sales taxes on Internet based
transactions; Yes, retailers must provide
clear auditable tracking methods of their
transactions, through the entire life cycle
of the transaction; and No – these
requirements are not relevant to large
businesses only, they pertain to retailers
of all categories and of all sizes.
The original misperception originates back
from a 1992 Supreme Court ruling,
known as the Quill case. The Quill case
was determined in the pre-Internet
arena, but was subsequently applied to
online transactions because of the
similarity in circumstances. In Quill, the
Supreme Court stated that it will not
enforce sales tax rules. One rationale for
the ruling was that of the undue burden.
In other words, because of the inherent
borderless nature of Internet transactions
– each transaction has the potential of
being subject to any-one of the over
7,400
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taxing jurisdictions in the U.S. alone. The
Supreme Court stated that tax systems
are so complex, and there are so many
jurisdictions, that it would be an undue
burden to require retailers to be familiar
with each and every jurisdiction, and
comply with all of the different rules and
jurisdictions. The Court was very explicit
though to say that sales taxes do apply to
these transactions, the court merely
refused to enforce the rules.
Obviously, lack of compliance is quick to
follow failure of enforc ement. As a result
– retailers have traditionally failed to
calculate, collect and pay sales taxes
owing on Internet transactions. Many
confused this lack of collection with the
Tax Moratorium Act that was enacted in
1998. The Moratorium Act has nothing to
do with Sales taxes. The Moratorium Act
merely stated that no new taxes could be
created on Internet transactions. This
Moratorium Act was enacted in response
to ideas that politicians started floating
for creating new types of taxes especially
for the Internet, such as ‘Internet Access
tax” or “bit rate taxes.” But the Tax
Moratorium Act was very explicit to
have no effect upon existing taxes,
such as Sales taxes. States did not
enforce Sales taxes for much more
practical reasons: there just was not
enough activity taking place on the
Internet – the dollars were simply not
there.
Retailers have
traditionally failed to
calculate, collect and
pay sales taxes
In the last two years both these
variables have completely changed.
There is much activity taking place.
In fact, studies are showing that
nearly $20B will be left on the table
in 2005 as a result of uncollected
taxes on Internet transaction.
State governments have also been
operating in the red, and have
empowered their agencies to seek
new sources of revenue. They need
to act, and act fast.
 All You Need is a Mouse

To address these circumstances and
respond to the Quill ruling, state
taxing agencies banded together to
draft and sign the Streamlined Sales
Tax Agreement, where emphasis is
placed upon rule uniformity and
simplification of compliance. The
states hope that with this process in
place, Congress will pass legislation
which will expand the long arm
capabilities of the court system, to
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sales taxes if they want to sell to
state governments.
Small companies, with revenue in the low
millions, are being hit with audits and
penalties of tens of thousands of dollars
for failure to collect taxes. Then there is
the offer that cannot be refused – start
collecting now, and receive an amnesty
for failure to collect in the past.
The bottom line is that sales tax
compliance is a real issue, independent
for further reference; (iv) be hooked
into systems that will allow it to track
the transaction through its life cycle; so
that (v) any changes made to the
transaction are reflected in the system;
(vi) on a periodic basis as may be
determined by statutes and regulations
– compile the data necessary for filing;
(vii) generate a return and report
necessary for complying with statutory
filing requirements; (viii) make the

reach out to out-of state retailers.
The SSTP came into effect on October
st
1 , when a dozen states formally
ratified rules reflecting those rules
required under the SSTP, with
another six states being in partial
compliance – associate members.
Nearly all other states have signed
the SSTP contract, but it will take
them some time until they fully
implement the rules.
Sales tax compliance does not begin and
end with the SSTP however. Current
Sales tax rules also apply to online
transactions. State taxing authorities
are aggressive in enforcing existing
rules, and not waiting for SSTP to come
into effect. Barnes-&-Nobles,
Borders.com and OfficeDepot found this
out the hard way via back-taxes,
interest and fines imposed upon them.
Thousands of consumers nationwide
were recently invoiced for taxes they
did not pay when purchasing cigarettes
through the Internet. Under Internet
Sales Tax Fairness rules, companies are
finding that they need to register and
pay
of the SSTP. Retailers need to be aware return available for review and approval
of this issue, and address it heads on. It by the retailer; (viii) file the return
is not one of those situations that you automatically and electronically straight
can beg forgiveness after the effect – into the systems of the state taxing
you will owe penalties and fines for agencies on the required date, helping
failure to comply on a timely basis. the retailer avoid fines, penalties and
Fortunately, there are solutions that can interest associated with late filing; (ix)
help you address this issue. In fact, obtain from the retailer funds necessary
Next Generation Solutions that are for payment of tax proceeds; and (x)
being introduced into the market pay the
promise to make this a
painless process, providing a This paper is dedicated to providing
simple, cheap, reliable,
accurate and effective
a review of the Next Generation Solutions, how
solution that operates in a they provide comprehensive solutions to address
completely automated all sales & use tax requirements, and entirely
manner, so that business remove the burden of compliance and auditing
owners can focus upon from the retailer.
generating business, rather Why, and how, are the
than on whether or not they Next Generation Tax Solutions
owe taxes, how much, when
the “True Compliance Tool”?
and to whom.
The perfect Next Generation Solution taxes owing on a timely basis, applying
would be (i) hooked straight into your electronic funds transfer methods to
transaction engine; (ii) provide the assure timely payment at the last
information necessary to assure that possible moment without incurring
the correct tax is being calculated; (iii) penalties for late payment.
save the transaction and tax data
 All You Need is a Mouse

FIRST GENERATION SOLUTIONS FOR THE SALES TAX MARKET

A typical sales & use tax transaction can be broken down to different elements.
These include the following components:

1 Tax determination . This element consists of being able to determine, in real time, what is the relevant jurisdiction that governs
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the transaction, drilling down through the rules of taxation of the given jurisdiction, figuring out the correct tax rate, and
applying it, to render an accurate tax calculation. The tricky part of this element is being able to perform these functions in real
time.

2
Transaction Tracking . Sales & use taxes are not determined just upon the tax calculation at the point of the
transaction. There are many events that can occur after the point of authorization which could impact the final taxes
owing. For example –did the product ship? (if it did not – no taxes are owing); was part / all of the purchase returned
at some future date (if the product was returned – no taxes are owing on the purchase); was the transaction subject to
some form of an exemption (if it was, was a certificate of exemption completed to substantiate eligibility for the
exemption)? All these are events that can occur post transaction, but before the date for filing of the tax return.

3 Filing of the Return . As with any form of taxation – a form needs to be filed with the taxing agency, which provides all
data relevant to the specific taxes being filed. These include data pertaining to the identity of the retailer (who is performing
of the

the filing); gross revenue; tax exemptions; returns and refunds; taxes owing; and to which jurisdiction (including local
jurisdictions, such as counties, cities, and special local taxes (stadium, public transportation, etc).

Proceeds . The bottom line of any tax is that of the proceeds that are actually being remitted to the taxing jurisdiction.

These need to reflect the amounts owing, as specified in the tax return. While we oftentimes attach our check to the 4 tax form, the actions of filing of
the return and paying the taxes owing are two distinct actions. Anyone who, in recent
years, has proceeded to electronically file their personal taxes can attest to this – they file the return and
separately proceed to transfer taxes owing under some form of electronic funds transfer.

5 Audit . The life cycle of a transaction, and the taxes owing upon it, does not end upon the successful filing of the tax return and
p spond to a request for an audit, to reassure the taxing agency that indeed taxes were calculated correctly, were all accounted
a for, and that the correct forms were filed, and proceeds paid in a timely manner. Audit standards require the retailer to maintain
y comprehensive reports and trails of the entire life cycle of the transaction, to support and substantiate each decision and action
m between initiating the transaction through the final payment of taxes.
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 All You Need is a Mouse
First generation technology solutions have been
around for nearly twenty five years. These solutions
tend to focus upon any one of these elements of
compliance, and provide a solution for only one. For
example, they might focus upon tax calculation
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functions or completing tax forms. They will typically
not be able to provide a solution for multiple elements
of compliance without some sort of external support.
These can get to be quite sophisticated
For example, users of SMB financial programs are all
familiar with the fact that these programs can print
out their tax forms. However these programs do not
connect to the up-front element of the transaction. In
other words, standard financial programs do not have
the ability of connecting to a shopping cart, and
provide tax determination in real time when the
consumer is authorizing the transaction. In addition,
these systems will typically not be able to perform
electronic and automated filing of the tax return –
they will provide a hard copy of the printed form. This
requires the retailer to still sign the form (after
checking the data); write the check; insert both into
an envelope and make sure they mail it in a timely
fashion.
Another example is that of tax calculation engines.
While these can get to be quite sophisticated,
following complex lines of logic and performing highly
complex series of functions in real time, they are
limited in scope to their ability to perform tax
calculations alone. These systems will typically not
have much, if any memory required for tracking a
transaction through its life cycle, and will require back-
end ERP systems to perform the other elements of
compliance, such as performing tax filing or
addressing audit requirements. One should not
confuse the sophistication of such tax calculation
engines, with their limited cross functional capabilities.
The retailer needs to perform these functions
Notwithstanding the complexity and sophistication of
these tools, the fact that they cannot perform the full
scope of functions required for compliance means that
the retailer needs to perform these functions. Either
by way of creating bridges between different
technological solutions that were not intended or
designed to talk with each other, or bridge them
manually. Any of these solutions means that First
Generation Tax Solutions do not solve the pain of tax
compliance. Inherently, they are more complicated to
use, more expensive to implement and maintain,
require much resources to operate and, will therefore
tend to break more easily and frequently.
 All You Need is a Mouse

NEXT GENERATION SOLUTION FOR THE SALES TAX MARKET

Conversations with CEO’s CFO’s and
any other c-level executive all
indicate that these people are
aware of sales & use tax issues that
face their company, how difficult it
is to comply, and has heard horror
stories of audits, fines an penalties.
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indicator that something is wrong with
the system. Are these people concerned
with how authorization is processed by
the financial institutions?; do they even
know who all the players are in a typical
transaction authorization process? No!
and neither should they. Business
for compliance. Next Generation
Solution are deigned to automate
processing of repetitive and time
consuming tasks, and eliminating
data and system gaps. This is a
long winded way of stating that
Next Generation Solutions provide

A survey of CFOs of small
companies found that they spend,
on average, at least 2 hours per
sales tax return, per filing period.
This number increases dramatically
as the size of the company grows
and revenue increases.
This presupposes that they have
good First Generation Solutions.
Even with good First Generation
Solutions in place, companies of all
sizes spend many employee work
hours in making sure that data is
processed accurately, and
transferred from one solution to
another. A survey of small business
managers found that they spend a
couple of hours a day
transferring transaction and deposit
data into their financial systems.
Larger companies were found to
have many FTE’s dedicated to these
functions. This data processing is
necessary to address the back end found that they spend, on averag
functions of tax compliance –
reporting, filing and auditing.
This high level of involvement,
activity and knowledge is a strong
executives should have to focus on for a seamless solution, which
building their business, and not on removes the entire burden of
figuring out their response to the state compliance from the retailer. By
tax auditor, explaining why a software using a Next Generation solution,
developer does not know why a the retailer should be reassured
business must distinguish between a that all their needs to address
customer who purchased their compliance are being taken care of,
doughnut at the counter, or ordered it and they can focus upon their main
while sitting at a table. Nor should they goal, that of generating business.
be treated as common thieves because The importance of Next Generation
they paid the correct taxes, just to the Solutions is best understood in light
wrong county. of the sense of complacency
companies are lulled into when, as
modern businesses, they use
Recently, Next Generation Solutions technologies to help management
have started to emerge into the work more efficiently. Management
market. The goal of Next Generation tends to set a goal of ‘figuring taxes on
tax compliance solutions is to remove transactions,’ and these First
in
the pain typically associated with tax Generation Solutions achieved that
compliance, and, as a single source, goal. Management mistakenly
provide for a single solution that assumed that using some form of tax
addresses all the elements required solution achieves the goal of accuracy
and efficiency. The availability and
A survey of CFOs of small companies use of First Generation Tax Solutions
tends to lull the business owner to
at least 2 hours per sales tax retur sufficientbelieve that they have taken
steps to maximize efficiencies
per filing period. and reduce liabilities.

In fact, tax auditors will not forgive
a retailer for incorrect taxes
calculated and paid, even if a
reliable First Generation Solution
was in use and relied upon.
For many organizations, the use of
paper forms or First Generation Tax
Solutions may lead to millions of
dollars in increased costs each year,
hard and soft costs. Companies that
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utilize Next Generation Solutions can
achieve significant benefits on many
levels. For example, they can reduce
costs of capturing data from one
system and converting it to another;
improve accuracy and reliability of
information; cut down on costs
associated with maintaining complex
audit trails and responding to audit
requests; and achieve higher
consistency overall in information
generated and used by the systems
and management in their decision
making processes. It is especially
perplexing given that the end results of
First Generation and Next
Generation Solutions appear similar –
both end with a tax return that is
filed with the taxing authority, and
taxes paid. However Next Generation
Solutions work on many different
levels, increasing the reliability and
reducing the overall cost
of the entire process.
For example,
First Generation Solutions that
generate tax forms, means
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that these forms need to be printed,
reviewed, signed, inserted into an
envelope, and mailed – in a timely
manner. In addition to these hard costs,
there are soft costs, which are more
difficult to quantify. Forms engines
might save some time by eliminating
manual entries, however they do not
save time over fully automated
systems. For example, printed forms
require higher levels of review
maintenance and human intervention,
to distribute, complete, physically
manage, and store. The information in
the form has limited access and
visibility – limited to those individuals
with actual access to the physical
document. A Next Generation Solution
should perform all of these tasks
electronically and automatically. By
automatically generating and
performing an e-filing on behalf of the
retailer, and storing the form in
information systems readily available to
the retailer, the Next Generation
overcomes all those deficiencies
associated with printed forms. The
retailer need not be concerned that
they have to activate the function
enough time in advance to
accommodate internal review and
approval processes as well as postal
delivery delays.
Printed Forms also do not indicate
incorrect or incomplete data until
physically reviewed. More concerning is
that printed forms can be modified
or changed –
erroneously or
intentionally, so that
even if the form
is generated electronically
from a First Generation Solution, there
is no guarantee that it will not be
changed, and filed with the incorrect
data. More concerning – that the
correct return be filed with the incorrect
agency, or the incorrect form will be
filed – any of which might automatically
trigger an audit. Electronic forms of
Next Generation Solutions have built-in,
auditable, internal rules of logic that
prevent these types of errors and
events from occurring. In effect, the
systems receive all data directly from
the transaction engine and transaction
tracking engine, assuring the use of
only transaction data, without external
intervention, and that it is filed on time,
to the correct recipient. While Next
Generation Solutions will allow manual
bypasses, these are more difficult to
implement, and will always record and
indicate not only what change was
made, but by whom, and when.
A reproducible, auditable trail is the
true differentiator between First
Generation Form Filing tax solutions
and those of fully automated Next
Generation Tax Solutions.
Next Generation Tax Solutions are the
true sales and use tax compliance

engines. The ability to determine
the accurate tax rate in real time,
factoring complex issues such as
transaction nexus – where the
transaction takes place, and
taxability of the given product on a
line by line item basis in that given
nexus, is but one of the issues the
engine needs to address. Another
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point of complexity is the ability to
provide transparent, valid audit
trails, providing documentation for
each and every decision pertaining
to the transaction made at any
given point of time during the life-
cycle of the transaction. The Next
Generation Tax Solution provides a
unified, single point of access, data-
set that seamlessly integrates with
all tax calculation, collection and
payment modules, rather than
requiring different audit trails for
each of these steps, leaving to the
auditor the act of reconciling these
different trails, hoping that the
benevolence of the auditor will lead
to the desired results.
Next Generation Solutions should focus
upon flexibility, maintainability;
integration and reliability. Performing
only two or three of the functions
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associated with tax compliance,
while admirable and more advanced
than what First Generation
Solutions typically provide, will still
not achieve the goals of the Next
Generation Solution. The solution
needs to perform all four of the
functions under one package. The
Next Generation Solution should be
flexible enough that it allows for
adaptability across different
systems, allowing to address many
different needs of the retailers.
The solution needs to
perform all four o
the functions under
one package.
In sum, the perfect Next Generation
Solution would be (i) hooked straight
into your transaction engine; (ii)
provide the information necessary to
assure that the correct tax is being
calculated; (iii) save the transaction
and tax data for further reference; (iv)
be hooked into systems that will allow it
to track the transaction through its life
cycle; so that (v) any changes made to
the transaction are reflected in the
system; (vi) on a periodic basis as may
be determined by statutes and
regulations – compile the data
necessary for filing; (vii) generate a
return and report necessary for
complying with statutory filing
requirements; (viii) make the return
available for review and approval by the
retailer; (viii) file the return
automatically and electronically straight
into the systems of the state taxing
agencies on the required date, helping
the retailer avoid fines, penalties and
interest associated with late filing; (ix)
obtain from the retailer funds necessary
for payment of tax proceeds; and (x)
pay the taxes owing on a timely basis,
applying electronic funds transfer
methods to assure timely payment at
the last possible moment without
incurring penalties for late payment.
 All You Need is a Mouse
NEXT GENERATION SOLUTION – WHAT FUNCTIONS SHOULD THEY PERFORM
So what should a retailer be looking for in a Next Generation solution? What type of functionality is it reasonable
to expect that these new services provide? What can you reasonably demand of your technology
1 Single Solution. Sales tax compliance requires multiple
operations. Starting at the beginning – figuring out what is
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the relevant jurisdiction and rules, and calculating taxes in real
time. But it does not end
there – what about the back end functions of compiling all of
the data, completing the tax return, filing the return and
sending in the proceeds? Why should these functions be
performed by three different software packages? A single
package should be required to provide a complete solution to
all of the se elements of compliance.
Easy Integration. Do you need to hire an army of
technical professionals to figure out how to integrate
2 the solution, and hook it to your shopping cart /
cash register? Obviously the answer should be no. There is no
reason that the technology solution require more than a couple
of hours (if even that) in set-up, installation and
complete integration with your entire commercial
environment.
3
Zero Maintenance. The problem about sales &use
taxes is that the rules change on an extremely frequent
basis. This means that First Generation solutions require
monthly updates and maintenance. When you factor in
receiving the updates (which are not free), integrating
them and updating the system – this is a highly expensive
proposition. You should not be concerned that you will be
paying fines because someone failed to update the systems
at the beginning of the month. Next Generation
Solutions have automated updates so that you
can rest assured that your systems are up-to-date,
calculating taxes based upon the most current rules.
provider?
4
Transaction Tracking. Transactions, by their very
nature are dynamic creatures. Comparing a picture of
a sales transaction at the point of sale and at the point
of reporting your taxes will in all likelihood show many
changes. Changes that could result from product returns, credits,
refunds, exemptions, discounts, and so forth. These changes have
to be reflected in the final count. Solutions that are dedicated to
tax calculation functions only do not provide this higher level of
transaction tacking. Next Generation
Solutions need to track this data to assure accurate reporting,
making sure that you get credit where credit is due.
Audit Reports. Who is not afraid of Sarbanes-Oxley? Personal liability
attaches today for failure to track 5 data that your company should
be tracking. Relying
upon multiple solutions to store different elements of
transaction data creates a disjointed audit trail that will not
pass muster. With a Next Generation Solution that tracks a
transaction through its entire cycle you kill a second bird
with the same solution – you automatically obtain a single
seamless audit trail for your SoX compliance needs.
6
Real Time Data. We are living in an information age.
Information has to be available to the decision makers
in real time so that decisions can be made instantly, in
reliance upon accurate information. Any delay in
receiving information places your competitor with a
competitive advantage. Gone are the days where you can
sit and wait for 12 hours from the time you submit a
request for information, and then spend 3 hours trying to
figure out what the report says. Data should be provided in
r should be intuitive, so that you do not need a degree in
e statistics and computer languages to analyze it.
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 All You Need is a Mouse

7 and
Automation of manual processes. If you have
people sitting and manually performing technical
repetitive tasks, you have an antiquated
system. The modern technical solution should automate
Fully redundant, high secure, highly scalable
solution. Do not compromise on the security of
the system – would you agree to take payments
from your customers in a non-secure environment?
9
these tasks for you, and should be designed so that it Reliability, security and the ability to handle any scope of
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can automate any such task that it is not already pre- transaction should be fundamental to any tax compliance
designed to perform. Even tasks that, until recently, you system you use. Do not trust the sales person on their
were told cannot be automated. word – they will typically not know what makes a system
secure and reliable. Make sure that the system has
undergone extensive testing applying stringent
requirements, such as ISO 2000 or NIST.

8
10
Electron ic Filing. No system should require you to
print out your tax forms, sign the form, print out a Low Cost. All this is available in cost effective tools.
check, staple them together and put them in the
mail with enough time in advance to accommodate postal You do not need to pay high fees for Next Generation
technology solutions that provide all of
delays. Your income taxes are being filed electronically
the above features. A good Next Generation solution is built
today on the last day of filing, without having to stand in
around scalability and automation, ease of use without
hour long lines at the postal office. Why not your sales
compromising upon quality, all of which mean that the costs
tax returns? The Next Generation Solution should handle
associated with using the solution are low, cost savings that a
back-end electronic filing, regardless of the state to which
sophisticated vendor will share with their customer base.
filing is taking place.
 All You Need is a Mouse
SUMMARY
Sales & Use taxes are not bound to disappear – they will stay
with us for as long as these taxes are an accepted method for
funding of government activity. State and local governments
will not allow an entire, substantive, stream of commerce
continue its commercial activity tax free, unless there is a
conscience decision that these transactions are to be managed
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tax free. States are starting to come down with a heavy step to
enforce taxes in this environment.
Those who believe that the failure of local governments to
effectively collect taxes on Internet sales indicates that the
Internet is a tax free haven, do not truly understand the online
environment. It is important to realize that true commercial
activity of substance on the Internet is a very new creature –
less than five years old. Before 1999 - 2000, people were still
afraid to conduct commercial activity on the Internet – it was
new, and people did not understand how the Internet operated.
Consumers were concerned to insert their credit card number
necessary to make purchases online. Till that time period, the
Internet was predominantly used as a marketing tool, web sites
were fancy brochures, which provided a telephone number for
the consumer to call in with their order.
That phenomena has changed in recent years, and with it, the
attitude of local governments in their approach towards
enforcement of sales tax rules. Governments cannot allow
billions of dollars to go uncollected under existing tax rules,
because that will nullify their ability to increase taxes in other
arenas. Accordingly, they have taken steps in recent years to
increase their enforcement efforts – tactically and legislatively.
Such catch-up steps are typical of government authorities,
which are constantly running to catch-up with recent business
trends. The fact that they are only several years behind the
curve is a feather in the cap, showing that
If we paraphrase from the old adage: “SELLER BEWARE.”
they realize the importance of this arena.
In parallel to the increase in government enforcement
activities, technology providers are improving their ability
to meet the needs of retailers to balance between the
seemingly conflicting interest of minimizing resources
and focus upon compliance needs, without compromising
upon quality of compliance. The currently emerging Next
Generation Solutions are filling those needs. They are
increasing efficiencies, reducing human intervention in
the process, and leveraging upon seamless automated
processes to reduce cost. The automated processes are
also operating to increase reliability and accuracy, reduce
lead time necessary for filing and paying taxes, as well as
addressing the ever increasing requirements for seamless
and reliable audit trails. A reproducible, auditable trail is
the true difference between First Generation form filling
tax solutions and those of the Next Generation Tax
Solutions. Next Generation Tax Solutions are the true
sales and use tax compliance engines. They develop the
data; gather it from the transactions, and address all
requirements imposed by state and local governments,
including reporting, tax payment and transparent
accurate and reliable audit trails.
The bottom line though is that the burden is upon
retailer to make their choice. Tax auditors a
enforcing the rules with increasing vigilance, and d
not accept excuses for failure to collect and pay sal
& use taxes on a timely basis.