Avalara : 2021 is “worse” than many accountants expected; technology can help make it better

In a new survey, accountants say nearly 56% of small businesses surveyed are in the 'danger zone,' and that sales tax complexity is blocking growth.

Although 2021 has so far ­­­­been markedly better than 2020 for some businesses, research conducted by CPA Trendlines finds it's been worse for many accounting professionals. In fact, more than 52% of accounting and tax professionals surveyed said 2021 was 'worse' than 2020. Those accounting professionals serving small businesses seem most downcast about the future. Yet the outlook isn't entirely grim: Lessons learned during the pandemic could help accounting professionals - and their clients - meet challenges head-on.

The future success of small businesses and accountants may hinge on technology. In fact, more than 52% of the accountants surveyed said that of the changes brought about by the pandemic, 'Keeping up with changes in online technologies' was highly important for small businesses with long-term impact. Furthermore, 54% believe their own firms need to adopt more cloud-based software, too.

Some key findings from the survey are highlighted below.

The long tail of COVID-19 is real

Despite 'continued economic recovery, reopening of establishments, and continued government response related to the COVID-19 pandemic,' 13% of accountants surveyed believe the next 12 to 18 months will be 'much worse' for small businesses. Another 26% expect conditions to be 'somewhat worse,' while 17% say the next 12 to 18 months will bring no changes from the current situation, which is difficult.

Accountants were more optimistic about their own firms:

• 34% believe the next 12-18 months will be 'about the same'
• 9% believe the next 12-18 months will be 'somewhat worse'
• 1.5% believe the next 12-18 months will be 'much worse'

More than one-third of respondents see a light at the end of the tunnel for themselves and their clients: 37% believe the next 12 to 18 months will be 'somewhat better' for their clients, while 41% believe it will be 'somewhat better for them.' There were even a few in the 'much better' camp, but there are always one or two incurable optimists.

Good or bad, most of the accounting professionals surveyed believe the COVID-19 pandemic will have long-lasting impacts on their firms and their small business clients.

Strategies that can help small businesses and accounting professionals succeed

Some changes the pandemic forced upon accounting professionals and their clients will serve them well moving forward. Here are some examples:

Rely less on brick-and-mortar stores

After living and working through 2020, more than 84% of respondents think it's moderately or highly important for small businesses to 'pivot from brick-and-mortar to doing business online and virtually.' Though there are far fewer restrictions on in-person activities today than there were a year ago, new outbreaks could bring them roaring back at any time. Brick-and-mortar businesses that expanded online capabilities for customers and employees in 2020 will be better able to navigate any future lockdowns.

It's been widely reported that the U.S. experienced 10 years' worth of ecommerce adoption in just three months during the spring of 2020. But as anyone working remotely because of the pandemic well knows, the shift to online isn't unique to retail. In written comments, some of the survey respondents who reported having a 'better' year in their own firms attributed it (at least in part) to online or virtual interfaces:

• 'We actually made some process changes ... and they worked.'
• 'My business was already set up to operate virtually. COVID just pushed customers who would have normally been hesitant to operate remotely with an open mind.'
• 'Clients are now used to sending info either electronically or by U.S. mail which tremendously cuts down on time wasted.'

Adopt more cloud-based technology

As noted above, 54% of the accountants surveyed consider it 'highly important' to adopt technology and workflows 'for a more online or 'virtual' environment.' Just over 31% said that adoption is 'moderately important,' while only 2% said it was 'not at all important.'

Most respondents also see a need for 'more cloud-based software, accessible anywhere, anytime, and constantly updated.' They also believe 'more automation, less handwork' is key 'to remain competitive.'

Be adaptable and innovative

Tax professionals recognize the need for their companies to adapt and innovate. Indeed, this came in second on the list of 'highly important,' and lowest on the 'not at all important' list.

This could be due, in part at least, to COVID-19 tax relief: President Biden signed the sixth federal coronavirus relief bill nearly one year after former President Trump signed the first. Businesses were given three extra months to file income tax in 2020, and one more month to file in 2021 (though estimated payments were due April 15, 2021). On top of the federal assistance programs, states provided a wide variety of state-specific tax assistance. It was a lot for everyone to navigate, particularly accountants and bookkeepers.

2020 challenged tax professionals in other ways, too. Many were forced to work remotely during 2020, and some continue to do so. It took adaptability and innovation to learn how to best handle clients' needs securely, while working from home (perhaps while caring for children or other family members). Out of necessity, firms long accustomed to pushing paper discovered how helpful cloud-based options could be.

In written comments, survey respondents advised their colleagues to 'Stay client-focused,' 'Be innovative,' and 'Keep up with technology.' Sound advice.

Automate sales tax compliance

When asked about online sales tax compliance, 38.95% of respondents said 'some' of their small business clients were complying with new collection and remittance requirements. However, 39.37% said small businesses were 'mostly not in full compliance.' These are sobering statistics.

For the noninitiates, most states now require certain out-of-state sellers to register with tax authorities then collect and remit sales tax. This is because the Supreme Court of the United States overturned a long-standing physical presence rule with South Dakota v. Wayfair, Inc. (June 21, 2018). Prior to the Wayfair decision, states were largely limited to taxing sales by businesses with a physical presence in the states. Post Wayfair, a physical presence is no longer needed (though physical presence in a state still creates a tax obligation): Businesses can create a sales tax collection obligation solely through their economic activity in a state, or economic nexus.

On the eve of Wayfair's third anniversary, all but two states with a general sales tax currently tax remote sales. Once Florida starts enforcing economic nexus on July 1, 2021, Missouri will be the last non-economic-nexus state standing - and a bill that would establish economic nexus in Missouri is sitting on Governor Mike Parson's desk.

In other words, this isn't some passing fad. States are serious about taxing remote sales in this age of ecommerce, and COVID-19 underscored that need. When consumers were reliant on online sellers, states that taxed those sales brought in more revenue than those that didn't.

Accounting and tax professionals know this, and many are hoping that 'technology will be able to provide tools to assist with compliance,' as one respondent wrote. Currently, only about 12% of the accountants surveyed say the handle 'most' sales tax issues. It's far more common for accounting professionals to handle 'some' (36%) or 'none' (24%).

Don't wait for hell to freeze over

According to CPA Trendlines, 2021 has been 'The Tax Season from Hell.' You don't need to wait for hell to freeze over to simplify tax compliance. Sales tax automation software helps companies streamline sales tax compliance. In fact, nearly half the states in this country encourage businesses to use cloud-based sales tax solutions.

Learn more about the findings of this survey.