Reinventing state tax compliance with technology

State tax compliance: It’s time to reinvent the game

There’s never been a more dynamic time for state tax teams to consider modernization, due in part to businesses demanding more value from the state tax function. It may no longer be enough to successfully manage compliance, provisions, and planning. Executives want the state tax function to become a better business partner, provide more insights, and create more value, all with the same budget or less. These strategic C-suite expectations require a fundamental change in how tax work is performed.

Thankfully, the timing is also right from a state tax technology perspective. The past decade brought an explosion of enterprise data at increasingly granular levels. At the same time, technology tools have matured to a point where many non-IT professionals can effectively access and work with large data sets in practical and meaningful ways.

Organizations are seeing great value being created by data analytics tools, robotic process automation (RPA) bots, data-wrangling technologies, and optical character recognition (OCR) tools. Artificial intelligence (AI) is being adopted to help automate certain tax decisions. Additionally, traditional compliance software suites are evolving rapidly to deliver more functionality, insights, and automation.

Seeing the opportunities

Technology can unlock significant value across the state tax compliance process. In many cases, the value stems from the automation of resource-intensive, manual processes. For example, our work with state tax functions suggests that most teams spend more than half their total time spent on tax compliance working with data: collecting it, manipulating it, analyzing it, and making it ready for downstream process use. Once you factor in the additional time spent producing state tax workpaper packages and working within compliance software, very little time is available for other value-generating activities like planning and analysis.

So where could the use of technology and the automation of data and analytics processes bring improved efficiency, quality, and value to the state tax compliance cycle? Consider the following key areas for strong ROI:

At Deloitte, we’ve spent significant time, resources, and intellectual capacity reimagining each step of the state tax compliance process. We’ve focused heavily on inserting technology tools to supplement human effort, replacing manual input with automation and allowing tax professionals to spend their time on high-value areas of the compliance process.

It starts with data flowing directly into the state tax function through feeds in a ERP system’s supplemental reporting engines. Process automation tools work to instantaneously pull or push data on demand in the format needed. Data-wrangling technologies are typically leveraged to speed up the data manipulation and transformation process.

Tax calculations and analysis are conducted, leveraging new or enhanced features within the existing tax compliance software. Software is often augmented by tools that integrate rules, calculation, and reporting functionality to speed up the analysis around areas such as apportionment, net operating loss tracking, state modifications, and tax reform calculations.

Rather than manually building the documentation and workpapers required to support your returns, process automation tools go to work on your behalf, assembling workpapers in real time by state and entity.

Diagnostic tools, OCR technologies, and process automation tools are combined in the review process to pinpoint any discrepancies or differences in the data in your tax returns as compared with your workpapers. Where the controls allow it, process automation tools can even correct the differences. Similar tools can be used to quickly and efficiently review e-filing packages against the finalized return and flag areas for review.

Throughout the process, sophisticated data analytics are creating visualizations that allow you to look at your data, identify anomalies, and uncover new insights more efficiently and effectively. You may use these visualizations to better understand your data (for instance, by comparing year-over-year values or by focusing on materiality), or you may use them to drive valuable conversations with executives through heat maps, interactive charts, and dynamic tables.

This is not a vision of the future; it is the here and now. Companies of all sizes and across all industries are now implementing a technology road map that progresses their state tax functions along this journey. And for many companies, it is becoming a reality and a significant value driver for the state tax function and the business.

So where do you start? Certainly not with the technology. This is about creating a technology-enabled transformation, not a technology-led one. In other words, the transformation must start with the business pain point in mind. For some companies, that will be in the tax provision process or in addressing the tax return process. Others will be looking at automating their more data-intensive processes, such as state apportionment or indirect tax. Some may be in the midst of a merger or corporate reorganization, where disparate systems must be aligned without increasing headcount.

Before any technology is purchased, you should also consider how value can be created through improvements to current data feeds, processes, and software solutions. Look for processes that can be standardized. Do a data “health check” to see if there are ways to enhance and cleanse your data before automation solutions are applied. Explore the full functionality of your existing state tax compliance software to see where enhancements can be achieved.

As you start to develop your technology transformation road map, consider the art of the possible. Talk to peers, technology leaders, and advisers to understand how organizations are leveraging technology in other areas of the business. And as you build your systems and technologies, think about what data you could use to improve your processes in the future.

Make it part of a larger transformation

While there are clear opportunities to drive meaningful value by applying technology across the state tax compliance process, organizations can achieve the greatest value when these projects are connected as part of a larger transformation. They can realize a greater ROI from investments in technology and leverage change management efforts already underway as part of the transformation initiative.

Ultimately, the adoption of new technologies could mean that experienced tax professionals are released from their manual tasks to instead focus on more strategic, technical, or value-added areas. State tax leaders have the opportunity to consider how they reallocate activities, develop new capabilities, and engage tax professionals as they transform the operating model. Additionally, technology investments made in the state tax function can bring similar value to other areas within the broader tax function, upping the overall potential for maximum ROI.

Whether through small steps or larger transformations, value from designing, delivering, and operating this reimagined state tax compliance function is achievable. There’s never been a better time for state tax functions to modernize.