Use Tax Accrual: Managing Systems and Personnel to...

Use Tax Accrual: Managing Systems

and Personnel to Address Tax Risk

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TUESDAY, FEBRUARY 26, 2013

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

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

Steve Peck, Northeast Regional Tax Manager, Georgia-Pacific, Atlanta

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

Steve Peck, Georgia-Pacific

[email protected]

Feb. 26, 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 12




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.

7

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

Slide Intentionally Left Blank

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

14

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.

20


• 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

21


• 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

22


• 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

23


• 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

24

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.

26

GEORGIA-PACIFIC EXPERIENCES WITH, APPROACHES TO ACCRUAL

Steve Peck, Georgia-Pacific

Use Tax: Company’s Goals

I. Objection function: Minimize sales and use tax over time, taking advantage

of all exclusions and exemptions allowed by law. We embrace the challenge

to tax on spend.

A. Tax determination

1. Biggest hurdle: Deciding on taxability at a transaction line level

B. Tax calculation

1. Based on location, ship-to/-from, state rules on freight, discount,

etc.

2. Tax engine is critical.

C. Tax validation/verification

1. Custom (simple) routine

2. Automatic self-assessment as/when necessary

3. Use tax onus is an essential factor of this tax challenge.

29

0 +/-

+/-

0

Calculated Tax

Within tolerance

(pay as-is)

Exceed tolerance

Short-pay and accrue

Short pay

(pay no tax)

Accrue use tax Pay as-is

30

Use Tax: Preference

II. Use tax preference (to billed sales tax)

A. Self-managed tax, based on our (knowledge of) use

1. Not subject to inadequacies of vendor billing sales tax capability or

accuracy

2. Validation routine allows non-acceptance of inaccurate billings – pay

nothing and accrue entire full measure of tax

a. Critical, as G-P is not just in Atlanta but ~250 domestic locations

B. Direct pay permit – pursue where allowed, aids/abets proper taxation

1. Phase-in rates (as in LA, GA, etc.) - nearly impossible to impose on seller

2. Managed rates – state or auditor arranged/compromised, i.e. taxing stores

on issue, or mobile equipment effective rate

3. Reduced rates for manufacturing, leasing, mobile equipment, motor

vehicles

4. All of the above can have a local component as well

31

Use Tax: Preference (Cont.)

II. Use tax preference (Cont.)

C. Vendor simplification – don‟t have to know taxability or precise situs

1. „Mixed orders‟ (taxable, partially taxable, exempt) are particularly onerous.

D. Recapture of tax dollars in challenge process – audit, reverse audit – expedited via UT

credit, as opposed to requesting credit from vendor

III. Compliance – effective and efficient return preparation

A. Built an intermediary system to capture transaction use tax (and billed sales tax), and GL

entries

1. Use tax can be „held‟ post-review of transactions we wish to challenge with the field.

a. Our experience: GL entries are often booked wrong/backward.

b. Adjustments can be made from prior periods (we built a system to auto-adjust

use tax accruals on an invoice from prior periods). G-P outsourcing, AP initiated

the change

c. Discount for timely filing

32

Use Tax: Tax Engine

IV. Tax engine – right tool for the right job

A. Purchase or develop; needs to be robust

1. Vertex and Taxware experience: Both good, improved over the last 15 years

2. Primarily, we have old Vertex customized to our own „Product codes‟ based

on GL account + tax codes delineating type of spend, use.

a. Has the necessary features to trap state rules, and allows interfacing

b. Improved capabilities to handle local caps (AR), tiered rate structure

(TN), etc. depending on your procurement functionality

B. We did not purchase and „bolt-on‟ to SAP MM/FI.

1. Expensive

2. Inefficient to procurement and payment

3. Post-process review methodology

4. In most of our mills, SAP for vital supplies only, Ventek for MRO/capital

34

Use Tax: Conclusion

IV. Summation – use tax benefits

A. Control your destiny - not at the mercy of vendor‟s knowledge of tax or our

use of purchase or billing incapabilities

1. Arranging vendor credits for tax is much tougher than adjusting

accruals.

2. Automate the UT accruals, ideally post-validation routine

a. We automated adjustments post-process

B. Better in the face of phase-in rates, partial rates, managed/auditor

compromised rates

C. Aids/abets compliance prep review (including „holds‟), filing discounts

D. Works well with tax engines – purchased or developed – allowing validation,

tax automation, adjustments for proper tax

E. In short, minamization/avoidance of tax hinges pivotally on stepping up

your role in self-assessment.

35

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