With the US Tax Day once again come and gone, there is no better time than now to discuss the necessity of application programming interfaces (APIs) in sales tax, value-added tax (VAT), and goods and services tax (GST) software. No matter the size of a company or the breadth of its products and services, they all need tax software that can bridge disparate and siloed data to manage the tax compliance process end to end. Having reliable APIs is the first step in achieving this goal.

Simplifying tax compliance with APIs

An API is a part of the software that defines interactions between multiple software platforms and is a way for computer programs to communicate. A good API should be well documented, which usually consists of technical content that contains instructions on how to use and integrate an API effectively. This, in turn, creates a better developer experience that allows users to integrate it with their systems as quickly as possible. Developers try to solve complex programming challenges, and APIs are meant to assist programmers in resolving these problems. 

Documentation of an API is an important area that needs attention. Most developers would agree that it’s much easier to implement code than document it. For this reason, programmers often pay little attention to documentation when launching new code. Therefore, it is crucial that they understand the API and know how to use it.

For tax software, one of the primary purposes of APIs is to integrate with back-office systems to bridge diverse pieces of data. For example, if a customer of an online retailer adds a product to their cart, the API needs first to confirm that the product is in stock and if it’s taxable, and then use the shipping zip code to look up any applicable sales taxes. The back office platforms that sales tax and VAT/GST compliance software needs to communicate include accounting & finance, inventory management, order fulfillment, distribution, and shipping. 

It’s also important for tax compliance software APIs to be regularly updated to ensure that tax rates and rules for all jurisdictions are correct. This is essential because outdated information can result in incorrectly calculated taxes. Compliance and regulations for taxes are constantly changing, jurisdiction boundaries are always shifting, and tax laws are regularly adjusted. The tax business is in a constant state of flux and thus, necessitates meticulous processes to streamline tax workflows. 

Updated and well-documented tax APIs can relieve some of these burdens by automating key processes, reducing manual data entry, and providing insights for analysis and decision support.

Tax APIs and marketplace facilitator laws

With the massive popularity of buying and selling on online marketplaces such as Amazon, Etsy, or Alibaba, a new breed of sales tax regulations has emerged called marketplace facilitator laws. These laws place responsibility on the marketplace facilitator to collect and remit sales tax on behalf of sellers. These laws are important because the seller is no longer obligated to handle this tedious process. They shift the obligation to collect and remit sales tax on the marketplace facilitator. 

Source: Avalara

These laws, which vary from state to state in the US, started to appear in 2017 when states realized that Amazon wasn’t collecting sales tax on third-party sales and, therefore, they were missing out on tax revenue. Tax APIs help manage these laws by applying the correct sales tax rate based on location and products sold. As of June 30, 2021, 46 of the 50 states have imposed some type of marketplace facilitator law.

Sales Tax and VAT Compliance Software category trends on G2 

Historically, traffic to G2’s Sales Tax and VAT Compliance Software category sees an average increase of more than 36% between the new year and the beginning of tax season in the US, emphasizing the seasonality and importance of this software. Additionally, in the last 12 months alone, the category has seen a 33% increase in new products added to the category and a 24% increase in user reviews. 

Change in new reviews and products in G2’s Sales Tax and VAT Compliance Software category in the past 12 months

This correlation between a constant stream of new products and user-generated reviews signifies the category’s popularity among businesses. Companies of all sizes can now conduct their business globally, which brings in the complexity of local and cross-border tax compliance laws. Tax compliance software and the APIs within them can act as the bridge between calculating taxes, filing returns, making payments, managing documents, and everything else involved in the tax compliance process.