The Automation of the Use Tax Determination John Kennedy Sr. Business Consultant Sabrix, Inc. Agenda Common Challenges of Handling Use Tax Determinations Traditional Approaches to Managing Determinations Next Generation Tax Solutions Benefits of Automation Things to Consider when Contemplating Automation Steps to a Successful Automation Project 1
Challenges Reside in Many Areas Constantly changing environment Limited separation of duties Multiple transaction types and points Diverse decision variables Manually intense transactions Multiple applications and platforms Time-consuming filing processes Many business entities and regions Business Process, Systems & Tax Environment Legal Entities? Operations US EU LA AP? Business Systems Applications Interfaces SFA CRM Quote Oracle Sales Process SAP Ariba Purchase Process Legacy Home Grown Post-Purchase Process OE Inv AR Req PO AP ERS FA Proj Inv. Mov e Tax Systems Tax App1 Tax App2 Custom/Native Manual Excel JE? = Tax decision-related codes, programming or logic 2
Traditional Transaction Logic and Process Flow Data Entry Business Applications Software Interfaces Tax Engine Prod- Code Tech68 Tech68 Svcs14 Bund76 Tech12 Cust- Code C1A1 C5B3 C3L1 C3A1 C1A1 Geo- Code NY3-27848 CA7-98977 CO4-56477 AZ4-87665 OH1-47443 Ex N Y N Y Y IF @Customer = 'NULL' IF @Product = 'NULL' SELECT CompanyName, OrderDate, ProductName, Quantity, Item.UnitPrice FROM Customers AS Customer JOIN Orders AS [Order] ON [Order].CustomerID = Customer.CustomerID JOIN [Order Details] AS Item ON Item.OrderID = OrderDate, ProductName FOR XML AUTO ELSE = Tax decision-related codes, programming or logic Challenges of A Typical Month Over 59 Tasks to be Managed Completion of Returns Required Each Month Perpetually Reliance on AP, AR, & IT Necessary to Complete Tasks Partial Data Residing within Multiple Sources Manual Review Required For complex transactions Lack of time & planning & analysis Tools to be proactive Prepare PLR Request Prepare & Review 270 Returns Meet with State Auditor on Sampling Method SUT Professional Research Proposal Structure w Finance Train New AP Hires with Updated Matrix Document Policy Changes for IT To Implement 3
Juggling Tasks A Break Out of Effort Monthly Compliance Audits & Controversies Financial Reporting & Forecasting Planning, Training & Management 59% 24% 11% 6% 59% 6% 11% 24% Financial Reporting & Forecasting Monthly Compliance Audits & Controversies Planning, Training & Management Areas of Effort Monthly Compliance 1. Data Collection 2. Consolidation & Reconciliation 3. Exception Review & Manual Adjustments 4. Preparing Tax Returns 5. Preparing Payments & Accounting Entries Audit & Controversies 1. Audit & IDR Management 2. Audit Data & Document Retrieval 3. Audit Research & Negotiation 4. Refunds & Credits 5. Audit Appeal & Controversy Financial Reporting & Forecasting 1. Tax Reserves & Provisions 2. Transaction Analysis & Tax Credit Studies 3. Sarbanes & Financial Audit Reviews 4. Reconciliation of Tax Accounts Planning, Training & Management 1. M&A Planning 2. Training Non- Tax Personnel 3. Transaction Structure Planning 4. Managing Tax Personnel 5. Non SUT Work: (Property Tax, Business License Tax & Excise Tax) 4
Compliance - Opportunity Cost Transactions Are Your Processes Costing You More Than They Should? IT Costs Penalties and Interest Business Region responsible for tax solution Ongoing Custom API Development Custom VAT Solution Diverted Capital Manual Tax Processes and Tax Errors Audit Expense Tax Research Tax Table Maintenance Exemption Management Tax Rate Lookup/ Errors Tax Training Simply Map Items, an ILLUSION! 1. Canned Software Delivered via Email 2. CAD/CAM MFG. Software 3. Custom Software 1. Canned Software License via Electronically 2. CAD/CAM Manufacturing Software 3. Custom Software 1. Unique product code is received for each line item. 2. Unique product code is mapped to Tax Solution s Unique product code to arrive at correct tax. 5
REALITY - The World Isn t Perfect 1. SOFTWARE 2. SOFTWARE 3. SOFTWARE 1. Canned Software Delivered via Email 2. CAD/CAM MFG. Software 3. Custom Software MAPPING ALONE ISN T THE ANSWER 1. No unique product code is received from the source application. 2. How do I fully automate the determination? Allocations The need to allocate a single item over several taxing jurisdictions or to unbundle an item into several line items for tax treatment. Sample uses Mass mailings. Determine the most accurate tax for mass mailing by using the addresses of the of the mailing recipients instead of a single address. Bundles and Kits. Where bundles or kits are documented on an invoice, but represented as a single invoice line there may be a need to determine tax based on each component and return all taxes back to the billing system. Computer Kit Allocation Software Training 6
Additional Challenges: Non Traditional Fees and Taxes More than just a Sales or Use Tax is Needed on the Transaction Examples: Battery Fees in California Industry-specific excise taxes (fuels, alcohol, tobacco, etc.) Hospitality taxes Insurance Premium Taxes Achieving Consistent Accuracy Assess and report the appropriate tax at each point in a transaction s lifecycle 7
II. Traditional Approaches to Managing Determinations Common Approaches Manual Processes ERP Applications Tax Calculators Subjective and error prone Time-consuming and expensive Little control over the use of policies Extremely difficult to scale, collectively Cost-intensive customization Difficult to keep timely, up-to-date Application- and platformdependent Poor separation of IT/Tax duties Process- or transaction typespecific Use of decision data is fixed, limited Focused on calculation vs. determination Difficult or impossible to audit 8
Milestones in Transaction Tax Automation Tax Calculation Engines Automation With ERP Tax Tables and Codes Global Tax Solution Manual Calculation Tax Professional Control and Visibility Respond and Manage Change Create Complete Audit Trails Reduce the Cost of Compliance Integrate Seamlessly into the Business Issues with the Traditional Approach Old Way Method Manual Administration controlled by AP, not the tax dept Decentralized Approach Multiple solutions across the company Custom-built integration with IT support Result Risk non-compliance/exposure Dispersed, inconsistent records/ time consuming consolidation BIG dependency on IT No leverage across the company 9
III. Next Generation Tax Solutions New Approach to Automating Use Tax 1. Centralized Management of Tax Policy 2. Ability for Tax Professional to Set Use Tax Policy 3. Single Source Repository of Transaction Data 4. Consolidated Reporting Mechanism 10
Traditional The New Approach Transaction Logic and Process Flow Data Entry Business Applications Software Interfaces Tax Engine Prod- Code Tech68 Tech68 Svcs14 Bund76 Tech12 Cust- Code C1A1 C5B3 C3L1 C3A1 C1A1 Geo- Code NY3-27848 CA7-98977 CO4-56477 AZ4-87665 OH1-47443 Ex N Y N Y Y IF @Customer = 'NULL' IF @Product = 'NULL' SELECT CompanyName, OrderDate, ProductName, Quantity, Item.UnitPrice FROM Customers AS Customer JOIN Orders AS [Order] ON [Order].CustomerID = Customer.CustomerID JOIN [Order Details] AS Item ON Item.OrderID = OrderDate, ProductName FOR XML AUTO ELSE = Tax decision-related codes, programming or logic New Way of Automation New Way Method Automated centralized tax compliance Easy to use web based interface Tax Professional control over company specific positions Accurate tax determination automated with ERP solutions for sales, use and VAT Result Tax professionals easily respond to change Complete audit trails, including meeting Sarbanes-Oxley requirements Global visibility and control over tax management Tax planning and optimization, trend analysis, and transaction modeling of key business decisions 11
Consistent control Manage tax processing and compliance, independent of application, entity or country Configuration without coding Non-invasive application connections Tax Policy Clearly Identified & Results Stored Rates & Rules Tax Policies Audit History Enables separation of duties Tax controls IT operations Browser-based configuration without coding 12
Real-time compliance reporting Consolidated reporting and transaction audit system Automated data integration for tax filing Single application to global deployment Simply Map Items, an ILLUSION! 1. Canned Software Delivered via Email 2. CAD/CAM MFG. Software 3. Custom Software 1. Canned Software License via Electronically 2. CAD/CAM Manufacturing Software 3. Custom Software 1. Unique product code is received for each line item. 2. Unique product code is mapped to Tax Solution s Unique product code to arrive at correct tax. 13
REALITY - The World Isn t Perfect 1. SOFTWARE 2. SOFTWARE 3. SOFTWARE 1. Canned Software Delivered via Email 2. CAD/CAM MFG. Software 3. Custom Software MAPPING ALONE ISN T THE ANSWER 1. No unique product code is received from the source application. 2. How do I fully automate the determination? Next Generation Approach 1. SOFTWARE 2. SOFTWARE 3. SOFTWARE SHIP TO is Null DEPT is MFTG Vendor is IBM 1. Canned Software Delivered via Email 2. CAD/CAM MFG. Software 3. Custom Software Utilize All information About The Transaction, With Or Without A Product Code, To Fully Automate The Determination And To Provide Accurate Tax Calculation 1. No unique product code is received from the source application, but there is additional transaction data! 2. Additional transaction data is analyzed to determine the exact Software type. 3. Each line is automatically mapped to the correct software product to provide accurate results. 14
IV. Benefits of Automation Key Requirements & Outcomes of True Automation 1. Consistent Accuracy All tax policies, rates, rules & logic are enforced by a single tax application 2. Consistent Control Tax professionals control all tax decisions 3. Consistent Efficiency Single source of record for all transaction tax liabilities efficient monthly filings, reporting, analysis and audit support. 4. IT Independence Tax professionals configure, manage and test tax requirements in the tax application vs. IT coding, programming and testing tax requirements. 5. Business Process, People and Systems Independence Support automated transaction tax determination, calculation and recording for all Sales, Purchase & Post-Purchase transactions, and all business systems & applications. 6. Consolidation Record historically rather than referentially all transaction and tax details in a consolidated audit database. 15
Business Value Added Accurate tax rates through automatic system data feeds Accurate and timely tax expense management reports More Efficient with legal guidelines Sarbanes-Oxley Jurisdictional Audits Centralized tax decision making processes in Purchasing Business Value Added (cont.) Improve or re-centralize plant tax compliance processes Digitize certificate management Build best tax practices Facilitates execution of tax policy 16
Consistent Efficiency Empower Tax, IT, and Finance professionals to better apply their true expertise V. Things to Consider when Contemplating Automation 17
Identify & Weigh I. Business Reasons Efficiencies, Sarbanes II. III. IV. Tax Reasons Accuracy, Audit Response Capability, Returns Preparation Scope Sales, Use, VAT? 1 Division? Entire Company? Budget Funding, Yearly Renewals, License Costs, ROI V. Timing Acquisition? ERP Upgrade? Start of New Year? VI. Buy In From IT? AP? VII. Assitance of 3 rd Party Advisor? Approaching Tax Determination Logic & Design WHO? HOW? WHERE? WHAT? 18
The Four Key Areas Of TRUE Tax Automation 1. Determination 2. Calculation 3. Recording 4. Filing Taxable or non-taxable and why? This is the Critical Step If taxable, what rate applies and to which parts? Have we documented all of the transaction detail to support our monthly compliance reporting and audit defense? How much tax needs to be reported and paid to each authority? VI. Steps to a Successful Automation Project 19
It s a Project Go at it With a Plan I. Plan and Schedule resources of Tax, IT, AP for input, & other relevant groups. II. III. IV. Work with a clearly defined Statement of Work including Roles & Responsibilities, expected time commitment for each step in the plan, etc. Engage 3 rd Party consultants if desired. Consider a Phase in Approach vs. Big Bang Understanding Your Tax Requirements 1.Understand Your Products and Services 2.Understand Your Company s Tax Footprint 3.Identify Exceptions in Each Authority For Your Products and Services 4.Categorize Exceptions By Product (What) Person (Who) Location (Where) Usage (How) 5.Identify and Document Tax Determination Requirements 6.Identify and Document Data Requirements To Support Tax Determinations -------------------------------------------------------------------------------------------------------------------------- 7.Identify and Document Tax Configuration Steps To Support Desired Outcomes 8.Configuration 9.Testing 10.Adjustments 11.Production 20
Deployment Efficient Implementation Process: Phase I Tax Policy & System Study Phase II Configuration Phase III Integration Phase IV Validation Deployment Time For more information, please contact: John Kennedy 847-864-3104 john.kennedy@sabrix.com Debbi Boone 847-328-3763 debbi.boone@sabrix.com Cory McLure 503-924-5033 cory.mclure@sabrix.com 21