use tax accrual: managing systems and personnel...

Use Tax Accrual: Managing Systems

and Personnel to Address Tax Risk

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WEDNESDAY, MARCH 27, 2013

Presenting a live 110-minute teleconference with interactive Q&A

Mike Dillon, President, Dillon Tax Consulting, Annapolis, Md.

Thomas Smith, Partner, HoganTaylor, Tulsa, Okla.

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Use Tax Accrual: Managing Systems and Personnel to Address Tax Risk Seminar

Thomas Smith, HoganTaylor

[email protected]

March 27, 2013

Mike Dillon, Dillon Tax Consulting

[email protected]

Today’s Program

Importance Of A Use Tax Accrual Focus

[Mike Dillon]

Improved Interactions With Systems

[Mike Dillon]

Leveraging Various Tools In Use Tax Accrual

[Mike Dillon]

Georgia-Pacific Experiences With, Approaches To Accrual

[Steve Peck]

Slide 8 – Slide 11




Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY

THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY

OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT

MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons,

without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to,

any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are

subject to change. Applicability of the information to specific situations should be

determined through consultation with your tax adviser.

IMPORTANCE OF A USE TAX ACCRUAL FOCUS


Managing Risk: The Need To Focus On Use Tax Accrual

• Sales and use tax audits begin with purchases.

– More important than ever to focus on purchases

– Auditors know use tax = low-hanging fruit

– D.C./state focus on use tax compliance

– Colorado/Tennessee notification requirements

– Use tax audits are a referral source for identifying

unregistered vendors

9

Managing Risk: The Need To Focus On Use Tax Accrual (Cont.)

• Most companies lack an internal tax funct ion

focused on sa les and use tax.

– Most companies focus on revenue and customers.

– Reactive compliance

– “Don’t know what we don’t know”

– When I ask the question = “deer in the headlights”

10

Managing Risk: The Need To Focus On Use Tax Accrual (Cont.)

• Most compan ies l ack a use tax accrua l p roces s

– So many variables that can affect wrong tax decision or

indecision

– No internal review of purchases for proper tax application

by vendor

– Internal review placed in hands of non-tax personnel

– Vendor incentive and A/P incentive

– Potential for overpayments as well as exposure

– Decentralized or complex purchasing means even more risk

11

IMPROVED INTERACTIONS WITH SYSTEMS


Improved Processes And Interactions With Systems

• Manua l use tax accrua l process : Interna l rev iew

of purchases fo r proper tax app l i cat ion by vendor

and/or account

– Goal is uniformity and a process

– A/P must apply tax laws and keep up with the

constantly changing product taxability rules.

– Incentive is expedient processing, not compliance

13

Slide Intentionally Left Blank

Improved Processes And Interactions With Systems (Cont.)

• Manua l use tax accrua l process : Interna l rev iew

of purchases fo r proper tax app l i cat ion by vendor

and/or account (Cont. )

– Inaccurate reliance on human knowledge and manual

processing

– Staff turnover

– Inaccurate recordkeeping in turn attracts tax auditors.

15


• Regular ly rev iew purchase accounts

– Large purchase accounts

– Special purchase accounts

– Specific vendors

• Sa les and use tax matr ix

– Manual or automated process

– Consistency and uniformity

16


• Sa les and use tax compl iance so f tware

– Automated tax decision, rating and return preparation

– Keep accounting personnel focused on higher-value work

– Seamless integration with accounting/billing

– Data archived for audit purposes

17


• Sa les and use tax compl iance so f tware: Few opt ions

on market

– Most solutions focus on sales transactions, not purchases

– again, this is why there is audit focus on the purchases.

– Even with automation, there is human involvement,

which always leads to the potential for error.

– Minimize the number of humans involved: Purchase order

vs. A/P coding

18


• Sa le s and u se tax comp l i ance so f tware : Requ i rement s

– Systems must address whats, hows and whens of a transaction.

– Some purchases are exempt by statute.

– Some purchases are exempt for resale, and a resale certificate

is required.

– Some purchases are exempt by use, and an exemption

certificate is required.

– Some purchases are exempt based on interstate commerce, and

consideration must be given to multiple jurisdictions and when

title is transferred.

19


• Sa les and use tax compl iance sof tware:

Requi rements (Cont. )

– Fixed asset and expensed/service purchases through AP

– Inter-company/interstate transfers for which tax was not

previously paid/underpaid

– Previously untaxed internal consumption items taken out

of inventory

– Samples and promotional items distributed throughout

country

20


• Sa le s and u se tax comp l i ance so f twa re : Requ i rement s

(Con t . )

– Determine whether use tax is due, based on decision matrix

– Determine if appropriate sales tax was charged based on

jurisdictional logic, product and use

– Generate required use tax based on location and rate

– Generate information into GL for accrual and remittance

– Generate reporting for compliance and audit

– Capable of accruing difference if vendor undercharges

– Capable of issuing short-pays and credits

21


• Sa les and use tax compl iance so f tware: What

sys tems are ava i lab le

– CCH CorpSystem Sales Tax

– Vertex

– Taxware

– BillSoft EZTax

– TaxAutomation and leading integrators can assist

22


• Sa les and use tax compl iance so f tware: Sys tem and

process cons iderat ions

– Must consider how these systems integrate with your ERP

or accounting platforms

– Must identify and capture key data elements needed

– Must pass purchase data elements such as GL account,

vendor, jurisdiction, vendor tax applied

– Must create transactions for unique items such as

inventory or sample removal

23

LEVERAGING VARIOUS TOOLS IN USE TAX ACCRUAL


Leveraging Other Tools For

Use Tax Compliance

• Ef fect ive rate agreements

– Simplify use tax compliance

– Take sales tax application out of hands of vendors

– States that authorize ERAs manage the audit with

taxpayer, and set rules and an effective rate for all

purchases as prescribed based on audit results

– Taxpayer issues direct pay permit to all vendors

– Taxpayer self-assesses use tax on all purchases at the

effective rate.

25

ACCRUING USE TAX ON A SHOESTRING BUDGET

Thomas Smith, HoganTaylor

First Steps

I. Build a custom taxability matrix dealing with the products you purchase

II. Needs to be industry specific, e.g.:

A. Healthcare

B. Energy

C. Manufacturing

III. There needs to be a reference as to what supports the answer.

IV. Different version for different users

A. AP should be on a single frame

1. Color

2. Laminated

3. Does not need all the support

28

Big enough to know. Small enough to care. SM

P \ 29

First Steps (Cont.)

IV. Different version for different users (Cont.)

B. Decision maker copy

1. Tabbed by state

2. All sources included

3. Three-ring binder

31

Benefits Of Training

I. Use the matrix as part of your training process

A. During most training classes I’ve conducted, the question

always arises as to the taxability of items.

B. The matrix can be rolled out as part of the training as a

“cheat sheet.”

II. Others who might need a matrix:

A. Project estimators

B. Purchasing departments

C. Engineering

32

Spreadsheets And Databases

I. On several occasions when clients have had budget restraints,

we have built a simple database to help them accrue the tax.

II. This usually occurs when the AP staff is resistant to training.

III. Makes more sense to outsource or do within the tax

department

IV. Tax decisions are just too complex.

33

Example

34

Using A Database

I. Trapped all of the AP data in a database

II. Sorted by vendor in groups

I. Always taxable

II. Sometimes taxable

III. New vendors

IV. Vendors issued a direct pay permit

III. This allowed us to focus time on the vendors that required attention.

IV. This system allowed us to review approximately 10,000 invoices in

less than 40 hours.

36

Manual Accruals

I. If AP can handle the task …

A. Most AP systems have an option to accrue tax within the

AP screen.

B. Write a “hard line of accrual” into the tax payable

account

II. Pull out the questionable invoices for a decision maker to

review

A. Use a spreadsheet

B. Use a database

C. Make copies or scans of invoices

37

Use An Orderly Process

I. Buy a stamp

II. Disfigure the invoice

38

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