Gain insight into the NetSuite Sales Tax landscape and how to strategically plan for NetSuite taxation implementation

Introduction

Compliance with Sales and Use Tax regulations is a challenging issue for accountants worldwide. While advancements in e-commerce systems have made it easier for businesses to expand into international markets, global expansion often brings increased complexity in regulatory compliance, especially concerning tax laws.

Sales Tax regulation is changing rapidly in the United States, where I am based. In the six years since the landmark 2018 “South Dakota vs. Wayfair” Supreme Court decision regarding States’ rights to collect sales tax, there has been increased complexity and confusion as states cast widening nets with broadening definitions of economic nexus and taxable sales.

NetSuite Taxation Landscape

As the Accounting community tries to keep up with the myriad rules and emerging legislation, NetSuite has been promoting “SuiteTax“, which is its improved replacement for the legacy tax engine that is built into the basic NetSuite offer. Does SuiteTax solve all the problems? Certainly not, but it can be a key element in getting towards better compliance and transparency. Before considering whether to upgrade from the Legacy Tax system to SuiteTax, it is important to understand the various distinctions in NetSuite’s taxation landscape, and where SuiteTax sits in that landscape. Below are the key elements to consider when implementing Sales Tax in NetSuite.

Tax Guidance

At the risk of stating the obvious, companies must first gain independent knowledge of their tax requirements in the regions where they intend to do business. NetSuite does not automatically dictate to a company whether they have “Nexus” in a particular region (although third-party integrations such as Avalara often do). Nor will NetSuite know which items are taxable unless we define the items as such. Companies need strong accounting counsel to guide them before configuring the system. Having a formal opinion memo ahead of the implementation is good practice so that NetSuite results can be compared with the intentions expressed in the opinion memo.

Nexus

“Nexus” refers to a connection between a business and a taxing jurisdiction such as a Country, State, or Municipality. In NetSuite, both the Legacy Tax system and SuiteTax require one to set up “Nexus” records and associate them to Subsidiaries. Once the Nexus records are correctly set, NetSuite can determine the correct Nexus applicable to the individual transactions, but only if the Nexus records were assigned to the Subsidiary first. Thus, it is essential for companies to stay on top of the various thresholds and rules that determine Nexus and to add or remove Nexus records based on their applicability.

NetSuite Editions

There are basic features related to taxation that depend on the NetSuite “edition” that a company is on. Often, companies using OneWorld are surprised to see new records appear, such as “Tax Periods” and VAT- or GST- related fields, when a Subsidiary is added. This is because the Country of the Subsidiary drives the Edition(s) that the company is on. As expressed by this NetSuite help article, “Subsidiaries within a single OneWorld implementation may use different NetSuite editions.” It is therefore important for companies to choose the “Country” of new Subsidiaries wisely due to the potentially large footprint driven by the edition. See below screenshot for the table of features relevant to the “editions” available.

Framework: SuiteTax vs. Legacy Tax

Armed with the above information, a company can decide whether to use the Legacy Tax module or activate SuiteTax. (Note: Standard US editions use Legacy Tax by default, and SuiteTax can be activated under the “Enable Features > Tax” page.)

SuiteTax provides an entirely different record structure and navigation than Legacy Tax, and it can be looked at as a different framework within which taxation functionality lives. I will use “framework” throughout this article to refer to the choice between Legacy Tax and SuiteTax. There are many distinctions between the two tax frameworks, and here are a few highlights. I hope to discuss this more fully in future articles:

	Legacy Tax	SuiteTax
Tax Presentation on Transactions	Line or Header Level	Dedicated Tab
Visibility of Tax Components	Opaque	Transparent
Flexible Exempt Customer Rules	No	Yes
Special Tax Rates for specific items	Yes	No
Origin and Destination Rules	Destination Only	Origin and Destination rules supported
US State Tax Rates	Needs periodic download of tables for accuracy	Automatically Updated (if using NetSuite Tax Engine)
Tax Reporting	Native reports for US, SuiteApps for International, including e-filing for some regions	SuiteApp driven for all, weak for US reporting, E-file for some regions
Configuration Effort	Low	Moderate

Tax Engine

If a company decides to implement SuiteTax, the next step is to choose a “Tax Engine.” The Tax Engine refers to the integrated tax database and calculator responsible for determining the correct Tax Codes or Groups based on transaction attributes subject to tax. Tax engines also provide various tax-related automation, such as Tax Registration number verification. Several third-party Tax Engines, including Avalara and Vertex, are available for selection. At the same time, NetSuite provides its own tax engine as a bundle that can be installed in SuiteTax-enabled environments.

NetSuite Legacy Tax “Engine” Parallel

If a company opts to remain within the Legacy Tax framework, there is a parallel concept to a “Tax Engine” without being named as such. The Legacy Tax framework contains a built-in basic calculator that performs rudimentary lookups based on shipping address, tax code, or tax group matching. However, the user needs to manage the tax codes and rates somewhat manually. This works adequately for smaller businesses with only one or two nexus(es) to worry about. Still, it explains why third-party tools such as Avalara have been popular in the United States. These third- party integrated tax providers offer better automation and a database of Tax Codes and Rates that is kept current. Companies that collect tax in multiple nexuses often need these other providers as the burden of manual updates becomes too onerous in Legacy Tax.

When it comes to SuiteTax, however, NetSuite’s own Tax Engine competes well with third-party tools for automation and up-to-date rate information. Thus, companies using SuiteTax and considering third-party tools for the Tax Engine should look at their offers around reporting and e-filing, which are areas not currently handled with native tools, at least not for U.S. nexuses.

Summary

To summarize: SuiteTax provides the framework for Taxation functionality, and there is a separate step to choose a Tax Engine to drive the actual tax calculation and processing within the framework. This is different than the Legacy Tax framework, where the tax calculation and limited automation are part of the framework. The native Tax Engine available in SuiteTax is more powerful than the Legacy Tax calculation functionality, and thus it mitigates the advantages of third-party solutions.

See the diagrams below to visualize the difference between the Legacy Tax and SuiteTax frameworks.

Conclusion

Understanding Sales Tax in NetSuite can be daunting at first. The key is to go slow, do plenty of testing, and be cautious when turning on features or selecting a third-party solution without understanding the benefits and impacts. I’m fortunate to work with professionals at Prolecto who have a background in the real business world and who are attuned to the needs of our clients’ accounting teams. I hope this article helps to remove some of the murkiness around the topic. Please reach out if you want help understanding Sales Tax concepts in NetSuite!