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

Transcription

1 Presenting a live 110-minute teleconference with interactive Q&A Use Tax Accrual: Managing Systems and Personnel to Address Tax Risk WEDNESDAY, MARCH 27, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Mike Dillon, President, Dillon Tax Consulting, Annapolis, Md. Thomas Smith, Partner, HoganTaylor, Tulsa, Okla. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 Use Tax Accrual: Managing Systems and Personnel to Address Tax Risk Seminar March 27, 2013 Mike Dillon, Dillon Tax Consulting Thomas Smith, HoganTaylor

6 Today s Program Importance Of A Use Tax Accrual Focus [Mike Dillon] Slide 8 Slide 11 Improved Interactions With Systems [Mike Dillon] Slide 12 Slide 23 Leveraging Various Tools In Use Tax Accrual [Mike Dillon] Slide 24 Slide 26 Georgia-Pacific Experiences With, Approaches To Accrual [Steve Peck] Slide 27 Slide 38

7 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.

8 Mike Dillon, Dillon Tax Consulting IMPORTANCE OF A USE TAX ACCRUAL FOCUS

9 Managing Risk: The Need To Focus On Use Tax Accrual 9 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

10 Managing Risk: The Need To Focus On Use Tax Accrual (Cont.) 10 Most companies lack a n internal tax function f o c used o n s a les a nd 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

11 Managing Risk: The Need To Focus On Use Tax Accrual (Cont.) 11 M o s t c o m p a n i e s l a c k a u s e t a x a c c r u a l p r o c e s 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

12 Mike Dillon, Dillon Tax Consulting IMPROVED INTERACTIONS WITH SYSTEMS

13 Improved Processes And Interactions With Systems 13 Manual use tax a c c rual process: Internal review o f purchases f o r proper tax a pplication by vendor a nd/or a c c o unt 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

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15 Improved Processes And Interactions With Systems (Cont.) 15 Manual use tax a c c rual process: Internal review o f purchases f o r proper tax a pplication by vendor a nd/or a c c o unt (Cont.) Inaccurate reliance on human knowledge and manual processing Staff turnover Inaccurate recordkeeping in turn attracts tax auditors.

16 Improved Processes And Interactions With Systems (Cont.) 16 Regularly review purchase a c c o unts Large purchase accounts Special purchase accounts Specific vendors Sales a nd use tax m a trix Manual or automated process Consistency and uniformity

17 Improved Processes And Interactions With Systems (Cont.) 17 Sales a nd use tax c o m pliance s o 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

18 Improved Processes And Interactions With Systems (Cont.) 18 Sales a nd use tax c o m pliance s o f tware: F ew options o n 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

19 Improved Processes And Interactions With Systems (Cont.) 19 S a l e s a n d u s e t a x c o m p l i a n c e s o f t w a r e : Re q u i r e m e n t 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.

20 Improved Processes And Interactions With Systems (Cont.) 20 Sales a nd use tax c o m pliance s o ftware: Requirements (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

21 Improved Processes And Interactions With Systems (Cont.) 21 S a l e s a n d u s e t a x c o m p l i a n c e s o f t w a r e : Re q u i r e m e n t s ( C o n 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

22 Improved Processes And Interactions With Systems (Cont.) 22 Sales a nd use tax c o m pliance s o f tware: What s ystems a re a v a i lable CCH CorpSystem Sales Tax Vertex Taxware BillSoft EZTax TaxAutomation and leading integrators can assist

23 Improved Processes And Interactions With Systems (Cont.) 23 Sales a nd use tax c o m pliance s o f tware: System a nd process c o nsiderations 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

24 Mike Dillon, Dillon Tax Consulting LEVERAGING VARIOUS TOOLS IN USE TAX ACCRUAL

25 Leveraging Other Tools For Use Tax Compliance 25 Effective rate a greements 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.

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27 Thomas Smith, HoganTaylor ACCRUING USE TAX ON A SHOESTRING BUDGET

28 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

29 Big enough to know. Small enough to care. SM P \ 29

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31 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

32 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

33 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

34 34 Example

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36 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

37 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 37 A. Use a spreadsheet B. Use a database C. Make copies or scans of invoices

38 Use An Orderly Process I. Buy a stamp II. Disfigure the invoice 38