Sales and Use Tax
Five Proactive Steps to Become Best in Class
Five Proactive Steps to Become Best in Class
State governments are looking for ways to raise revenues and your tax dollars are at risk! Two methods they are currently using are (1) increasing their audits and (2) keeping your tax dollars in their treasuries that you may have unfortunately overpaid.
Sales and use tax overpayments add up, so you need to be proactive to find them on your own. It can certainly be worth the effort. A couple of recent examples show why: One Global 1,000 company was paying both sales and use taxes on the same purchases, resulting in an overpayment of nearly $3 million which was eventually refunded by the state. Another found it overpaid use taxes totaling $1.5 million on nontaxable software license fees. Both companies have implemented corrective action plans that will affect their bottom lines and cash flow.
Be proactive and take the following five steps that can provide sales and use tax solutions to become best in class.
1. Prepare Proactively for Sales and Use Tax Audits
Are you prepared for a state tax audit when you least expect it? Have you:
- Created a plan that your tax team understands and can implement.
- Conducted periodic internal reviews to determine statutory compliance and ensure supporting documentation is accessible on demand.
- Reviewed your state filings before state tax examiners arrive.
Many best-in-class companies partner with third-party multi-state tax specialists to conduct “reverse” sales and use tax audits. A reverse audit looks at disbursements to identify and recover taxes paid that you didn’t owe. In addition, supporting claim documentation is compiled and management of the entire refund process through final resolution with taxing authorities and/or suppliers is included Identifying the root causes of tax overpayments yields recommendations to prevent errors from recurring and improvements in cash flow through refunds from states or suppliers, liability adjustments and lower compliance filings.
One Global 1,000 company discovered it was paying both sales and use taxes on the same purchases, resulting in a refund of nearly $3 million.
2. Evaluate the Configuration of Your ERP System
Is your company’s ERP platform properly configured to determine your sales and use tax obligation? Take a proactive approach and periodically evaluate the following critical elements to ensure proper sales and use tax disbursements are made:
- Material Number: the goods or services being purchased.
- Plant Location: where purchases will be used or consumed.
- Tax Jurisdiction Code: plant location and cost center assignments (usually from third-party “bolt-on” software to your ERP platform).
- Taxability/Tax Determination Matrix: the appropriate tax code for material numbers associated with each tax jurisdiction code.
- If any of these settings is out of date or configured improperly, you may end up paying too much or too little tax.
3. Collaborate to Make Solutions Work
The specific work processes used by your procurement, accounts payable, information technology, and tax teams directly affect your sales and use tax disbursements. See how a few examples determine results:
- Procurement impacts the accuracy of sales and use tax disbursements as Purchase orders are created. One common mistake is to misidentify the actual location where goods or services are shipped to or consumed or used. Establishing ERP defaults is also within the purview of procurement. Drop-down menus are used to select the proper material number, which may impact the taxability code.
One company discovered its platform was set to apply California as the default plant location, despite the fact that purchases were being shipped throughout the country.
Another discovered inventory items mistakenly defaulted to a taxable tax code, with no viable workaround available. A system change was required.
- Accounts payable processes impact disbursements. Does AP match invoices to purchase orders to make certain the correct tax is applied? Does AP routinely check to see if tax is included on the supplier’s invoice before they trigger your ERP platform to calculate use tax? If not, you may double your tax payments. It is also important for AP to segregate sales tax amounts in your ERP system as invoices are entered for payment. Doing so is imperative to analyze transaction data to uncover sales and use tax errors.
DO YOU UTILIZE TAX TECHNOLOGY TO MONITOR YOUR SALES AND USE TAX COMPLIANCE IN “REAL TIME”?
- “Back-End” Technology—to assess your overall sales and use tax compliance functionality on a periodic basis
- Audit Planning Tool—“snapshots” of where sales and use tax payments were made by vendor, or by state, or by company/division/business unit, among many others
- Other Sales and Use Tax Initiatives—“snapshots” of transactions where both sales and use tax were paid, transactions where sales or use tax was not paid, application of sales tax to specific vendors or commodity codes, etc.
- Information technology can work with your tax team to address system configuration issues and to make enhancements that ensure proper sales and use tax disbursements. IT may also have the critical responsibility of keeping your ERP system and third-party sales and use tax software up to date.
- Tax team members should review work processes and ensure established procedures are being followed. They should follow changes in the tax law, apply those changes to business operations and communicate critical information to key players in procurement, accounts payable and IT.
4. Analyze the Root Causes of Errors and Implement Corrective Action
Take a close look at transactional data and past audit results to find patterns that indicate configuration issues, work process errors or misunderstanding of tax laws. Track problems back to the department and observe their processes for corrective action. Working with outside tax solution providers will enable root cause analysis and corrective action recommendations.
5. Use Technology to Monitor Sales and Use Tax Disbursements
Today software solutions are available to help you evaluate your sales and use tax exposure. Continuous monitoring software can provide real-time, transaction-based data to prevent both overpayments and underpayments. The same technology is used on the “back end” to assess your overall sales and use tax compliance on a periodic basis. You can generate tax payment reports and sort the information by vendor, state, business unit or other parameters you choose. You can readily see transactions where both sales and use tax were paid, as well as instances where no taxes were paid at all. You also can determine how sales taxes were applied to specific vendors and to specific commodity codes. Reviewing such information on a regular basis can help you fine-tune your payment platform and work processes for more accurate results.
To Find Out More
If you would like to know more about best practices that can reduce your sales and use tax exposure, contact apexanalytix at 800-284-4522.
About the Author
David P. Bunnell, Director of Client Tax Solutions with apexanalytix, collaborated with procurement, accounts payable, information technology and tax professionals to present this article. He previously worked as a senior auditor with PRGX and as a consultant and director of purchasing and inventory control with Bostrom Seating. David also owned his own outsourcing logistics and just-in-time delivery business and has led three wholly owned subsidiaries of a mid-sized construction industry conglomerate.