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T a x T u e s d a y W E B I N A R

Top 5 Sales and Use Tax FilingChallenges for Manufacturers

…and how to fix themP R E S E N T E R S

Antonio Di Benedetto – Director of Tax

Ashley Brody – Director of Compliance Services

F e b r u a r y 1 4 , 2 0 1 7

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2 SOVOS, the leader in Business-to-Government tax compliance

Sales & Use Tax

1099 Reporting

Beverage Alcohol

ACA

AEOI

E-Commerce Tax Automation

LatAm Compliance

VAT Reporting

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3 SOVOS, the leader in Business-to-Government tax compliance

4,500 clients operating in 120 different countries including nearly half of the Fortune 500 trust Sovos for their tax compliance and reporting

Proprietary and Confidential the information and materials in this document are not for use or disclosure outside of Sovos Compliance, LLC. except under express written consent.

4 Today’s speakers:

Ashley BrodyDirector of Compliance ServicesSovos

Antonio Di BenedettoDirector of TaxSovos

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5 Agenda

• Manufacturing Trends that are impacting your business and their effect on filing performance

• The Top 5 Challenges that lead to inaccurate filing• How to rethink your process to ensure accurate and timely

filing • Q & A

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Trends Impacting Manufacturers…and why they are making Sales and Use Tax filing harder.

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7 Major forces for change

• Growth is at the top of manufacturing leadership priorities.

• Orgs need to continually break in to new markets in order to grow.

• Offering new products and new services while expanding into new geographies and new channels of distribution is complex.

Source: http://www.nam.org/outlook/

Proprietary and Confidential the information and materials in this document are not for use or disclosure outside of Sovos Compliance, LLC. except under express written consent.

8 Major forces for changeImpact on the Filing Process:

• Expanded geographic footprint means more jurisdictions, more rates and rules to manage and more filing obligations.

• New products and channels create additional complexity in the business for accurate nexus determination and exemption management.

• Business growth, expansion and M&A activity leads to challenges with decentralized processes, system/data issues and more potential points of error.

Source: http://www.nam.org/outlook/

Proprietary and Confidential the information and materials in this document are not for use or disclosure outside of Sovos Compliance, LLC. except under express written consent.

9 Major forces for changeMore sophisticated customers are being driven by communication, knowledge sharing. The demand for customized products is creating a new competitive climate that is driving the need for faster innovation in the business.

Source: http://www.industryweek.com/future-manufacturing-2020-and-beyond

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10 Major forces for changeImpacts on the Filing Process:• More and faster change in the business

• Drive for investment in new equipment and production technology

• Resulting in the need for greater efficiency and cost reduction in other areas of the business

The need for speed and investment!

Source: http://www.industryweek.com/future-manufacturing-2020-and-beyond

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11 Major forces for changeRegulation and, in particular, indirect taxes are expanding and under increased scrutiny as states look to fill their revenue gaps.

Regulators are: • using more technology• sharing more information and• driving for more data in near real time

Source: http://www.industryweek.com/future-manufacturing-2020-and-beyond

3 of the top 10 market challenges relate to regulation

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12 Major forces for change

Impact on the Filing Process:• Data needed and forms keep

changing at a more rapid pace

• Increased scrutiny from regulators, and more automated systems that will catch errors, trigger audits and increase risk to the business.

Source: http://www.industryweek.com/future-manufacturing-2020-and-beyond

3 of the top 10 market challenges relate to regulation

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Influences on Filing Process

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Top 5 Issues Creating Challenges in Your Filing Process

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15 Typical Manufacturing Filing ProcessBuy: Accounts Payable

Purchase Transactions:PO, P-Card, Invoice, Other

Validation Correction, Short Pay, Accrual

Data Consolidation

Review: Corrections / Reconciliation

Filing:Returns Prep / Transmittal

DOR

1

Invoices / Billing

Taxability: Sales, Exemptions

Sell: Accounts Receivable

Audit Audit

Tax Systems:

People:

ERP

TaxabilityDetermination (Use, Direct Pay,

Vendor Validation)

AP

Tax

IT

Pur

RF XL

AR CRM

E com XL

AP CSRAR

Credit

Pur

DOR

2DOR

3DOR

4

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Challenge #1:Rapidly Changing Obligations

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“I’ve been in tax for30 years, and I’venever seen in my professional life such evolution of taxat this pace, ever.”

Chief Tax Officer

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18 Challenge #1 Keeping Up With Changing ObligationsExisting Rules and Regulations: Manufacturing Exemptions

1. How the items are used in the manufacturing process?• Directly • Exclusively (100%) • Predominately (>50%)

2. Where are the items being put to use in the process?• Existing facility• New Facility• Expanding Facility

3. What part of the manufacturing process are items being used?• Production• Conveyance• Pollution Control• Packaging• R&D• Quality Control

4. What are the types of qualifying items? • Machinery and equipment/replacement parts/tools• Raw materials • Fuel energy used in manufacturing process• Software and or services

5. What is the useful life of items used in manufacturing?

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19 2016 at a glance…State and Local Rate Changes: 1,995

Total Rule Changes in our Determination Engine: 341,018

Total Form Changes in our Filing Solution: 296/1394 = 21%

“Too much time spent on regulation, compliance, taxes and not enough resources dedicated to growth of the business.”

Electrical equipment and appliance manufacturer

National Association of Manufacturers Outlook Survey – Q3 2016

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20 Challenge #1 Keeping Up With Changing Obligations

Iowa – July 1, 2016• The sales and use tax exemption for certain computers, machinery,

equipment, and replacement parts will be expanded to include “supplies.”• The legislation also created new definitions for both “replacement parts” and

“supplies.”Louisiana – Machinery and Equipment

• Increased state tax rate apply as of April 2016. • 2% – April – June 2016• 1% – July 2016 – June 2018• 0% – July 2018 – March 2019

New Mexico – Five year phase-in of manufacturing exemption.

New rules, rates and regulations from states

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21 Challenge #1 Keeping Up With Changing Obligations

State Legislation• Various states have enacted click-through nexus laws. • Additional states have affiliate nexus rules• Some state have enacted economic presence laws.

Federal Legislation • Federal legislation enabling state governments to collect sales taxes and use

taxes from remote retailers with no physical presence in their state.• Marketplace Fairness Act• Online Sales Tax Simplification Act• Remote Transaction Parity Act

Evolving sales tax nexus rules

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22 Challenge #1 Keeping Up With Changing Obligations

LouisianaHouse Bill 30 expands the definition of “dealer” to include every person who manufactures or produces tangible personal property for sale at retail, for use or consumption, or distribution, or for storage to be used or consumed in a taxing jurisdiction:

• Click-through Nexus• Intellectual Property Nexus• Affiliate Nexus• Nexus – Sub Ownership Interest

Alabama/South Dakota/Tennessee• Alabama all remote vendors whose annual sales of tangible personal property in Alabama

exceed $250,000 to collect and remit Alabama’s sales and use tax.• South Dakota – sellers who conduct 200 separate transactions annually or $100,000 in annual

sales to collect and remit sales and use tax as though that seller had a physical presence• Tennessee – will be enacted 7/1/2017.

Evolving sales tax nexus rules

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23 Challenge #1 Keeping Up With Changing ObligationsTechnical requirements for compliance

State thresholds require online e-file mandates • California requires e-filing• Florida - $20,000 threshold for e-filing

States movement to new methods of compliance• TN – moving to XML upload.• SC – moved to XML upload.• AZ – providing XML upload.• PR – may move to XML upload.

Massachusetts Michigan Minnesota New Jersey Pennsylvania District of Columbia New York Ohio Oklahoma Tennessee Vermont Connecticut

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24 Challenge #1 Keeping Up With Changing Obligations

Resources and expertise• Team of tax experts to keep up with all the taxability, form, rate and technology changes. • The team not only has to keep up with them, but maintain all new compliance.

Allocating time from IT department• Competing projects and resources for IT team to implement such changes. • Schedule time for IT to assist with last minute changes when already scheduled. • If they cannot then your organization calculates tax incorrectly.

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Challenge #2: Changes in the Business

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26 Challenge #2: Change Management• Geographically distributed organizations• Expansion into new markets• Growth of company• Fractured processes• Transactional data living in different places

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Challenge #3:Managing Tricky Transactions

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28 Challenge #3: Tricky TransactionsUnderpayment of tax to Department of Revenue

• A/R or A/P transactions handled outside of the normal course of operations• Promotional use of inventory• Under-reporting consumer’s use tax on purchase of manufacturing items• Research and development rules vary by state• Drop shipments – understand rules for various states• Procurement cards – integration process challenging

Overpayment of tax to vendor on invoices• Invoice validation – based on manufacturers specific circumstances.

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Challenge #4:Accurate Upstream Determination

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30 Challenge #4: Accurate Determination

• Inability of existing technology to handle correct determination • Data accessed from disparate systems• Risk of under/over remitting, P&I, or potential audits• Additional time and resources needed to correct inaccuracies

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31 Challenge #4: Accurate Determination

Exemptions Certificate Management • Collection• Validation• Maintenance• Reporting & Audit Defense

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32 Polling Question #5

How do you manage your exemption certificates? a) Paper copies b) PDF copies stored on a networkc) Third-Party certificate management solutiond) Other

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Challenge #5: The Human Factor

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34 Challenge #5: The Human Factor

Lack of controls• Is the system capturing information and data properly?• How is data collected or aggregated? What about data integrity?

Subjective determination / training & knowledge transfer• A/P clerks managing taxability determination• Procurement folks providing exemption certificates for manufacturing. • A/R team managing exemption certificates

Inconsistent system updates• Disparate systems and processes lead to inconsistent updates and errors. • Lack of consistency increases audit risk.

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35 Challenge #5: The Human Factor

Process managed by variety of roles• May have procurement, sales, A/P or A/R teams involved in the process. • Tax team is not as involved in all of the day to day transactions and requests.

Training and knowledge transfer• Getting tax team involved within each of these A/R and A/P processes and setting up

automation to safeguard against costly mistakes. • Training and knowledge transfer within these teams is vital for continued success. • Tax needs to revisit processes at regular intervals.

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Solutions!

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37 Filing Refined

Accurate Filing

CentralizeAggregateCorrectReconcile

Data

Single Source for DeterminationIntegrated Exemptions

Determination

Common PlatformControlsBenchmarks

Discipline

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Getting the Data RightManaging your systems and data

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39 Centralizing & Aggregating Data

Best Practices:• Use a centralized tax platform to

manage the data – single source of truth• Take control back from IT• Reporting capabilities to look at totals

by state, transaction type, business line, product line, customer, etc. – real time – no waiting

So what’s the problem?

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40 The data you needData elements for needed successful filing:1. Origin address information2. Destination address information3. Either gross + exempt

OR taxable + exempt

Address components: • Include at a minimum: city, state, zip• Ideal: city, state, county, zip+4

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41 Reconciliation & ReportingBetter:• Work with IT to build scheduled queries

with the fields you need • Make corrections in one system• Utilize reporting to help navigate the

“my numbers don’t match” problem • Understand the workflow for easier

reconciliation issue triage

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Getting Determination RightManaging changes and exemptions

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43 Multiple Systems InvolvedBuy: Accounts Payable

Purchase Transactions:PO, P-Card, Invoice, Other

Validation Correction, Short Pay, Accrual

Data Consolidation

Review: Corrections / Reconciliation

Filing:Returns Prep / Transmittal

DOR

1

Invoices / Billing

Taxability: Sales, Exemptions

Sell: Accounts Receivable

Audit Audit

Tax Systems:

People:

ERP

TaxabilityDetermination (Use, Direct Pay,

Vendor Validation)

AP

Tax

IT

Pur

RF XL

AR CRM

E com XL

AP CSRAR

Credit

Pur

DOR

2DOR

3DOR

4

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44 The Road to BetterUnderstand the causes:• Where does all of my data live? Is that necessary?• System (rate/rule) out of date? • Incorrect customer setup?• Unfamiliar jurisdictional requirements?• New product?• Transactions won’t reconcile?• Need to get to the root cause!

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45 Single-Source Determination

Best Practices:• Use a centralized tax platform for determination • Use determination for all transactions (AR&AP) • Fully integrate your exemptions with a centralized

database, validation rules, transformed certificates, and reporting capabilities

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46 The Road to Better

Better: • Start with determination • No tax engine? Have a rate file and taxability matrix in place• Digitize, organize, and update exemption certificates

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Operating with DisciplineImplementing practices to help you remain diligent

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48 Limit the “Human Factor”

Best Practices:• Utilize a common platform and reports • Limit involvement from others – mainly IT• Educate teams, set benchmarks, and monitor the process• Conduct regular reviews (nexus, product taxability, etc.)

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49 Take-aways

• Understand where your business is going – products, geographies, system changes, etc.

• Use that knowledge to plan your approach – taking motivations of all into consideration

• Recognize that compliance is never done – systems and processes need to be flexible

• Centralize as much as possible to improve control

T H A N K Y O U

Watch the on-demand replay of this and other compliances webinars at http://sovos.com/education/webinars

W W W . S O V O S . C O M