Manage Taxes on Purchase Transactions Effectively to Significantly Improve the Bottom Line
Tax Exposure
States are under continual pressure to increase revenue and decrease spending. State revenue departments are asked to bring in more tax revenue and often hire additional tax auditors to do so. Additional auditors increase the number of taxpayers that states are able to audit increasing a taxpayer's likelihood of being audited on a regular basis.
Increased audit frequency results in additional hours spent in audit defense. Even a no tax audit assessment can require hours of preparation time. One area of audits that can take significant time in audit defense is use tax.
Use tax assessments during an audit are very common. Auditors spend a significant portion of audit hours reviewing purchases looking for unpaid sales/use tax. This review can be performed manually by the auditor or more frequently through the use of statistical sampling tools. Regardless of the manner, use tax review is a focal point of the audit.
Effective use tax management will reduce the amount of time an auditor must spend reviewing purchases and will greatly reduce the amount of time a tax professional must spend researching the auditor's findings. Use tax is a direct cost to the company and under-reporting use tax can result in significant audit assessments. In addition to the tax due, states can impose interest and penalties for underreporting.
The Complexity
Determining the correct tax to be paid on purchased items is complex. More than 7,600 taxing authorities across the United States have different rates and exemptions for a wide variety of products and services. Compounding this complexity is the fact that taxes on the identical item will vary based upon how the item is ultimately used by the company making the purchase.
Tax on purchases can be paid in different ways. Frequently the seller will include tax on the invoice - but often it is not the seller who will know how an item is used. It is also possible that the seller did not charge the correct rate - only billing for state tax but not local tax. Therefore it is important that the purchaser verify the tax that is on the invoice. If the seller did not charge the correct amount, the purchaser must remit the additional tax to the right government agency. Consumers Use Tax is a tax that must be self-assessed by the purchaser on taxable items where the seller did not collect the appropriate tax.
The Barriers
Effective tax management starts with correctly identifying which purchases are taxable and which are exempt. This continues with verifying the amount of sales tax charged by the vendor and accruing any use tax if necessary.
Purchase Transaction Complexity
Information about the usage of an item or items being purchased is critical in order to accurately determine tax. Is the item taxable? Does it qualify as resale? Or, does the item qualify for an exemption such as a manufacturing exemption? Purchase transactions are complex and while much of the intended usage information is known at the time of requisition, requisition systems rarely capture and pass complex usage information forward to the purchasing system and onto a purchase order. Weeks or months later at payment time, when most companies determine, pay and accrue tax in accounts payable, the intended usage is generally no longer known. This leads to costly tax errors at all levels - both from vendors who charge taxes that are incorrectly paid by purchasers and from purchasers who incorrectly accrue and pay taxes that are not due.
To address this complexity and correctly determine taxes on purchases, a tax solution must be capable of evaluating as many different transaction elements as necessary. The Sabrix Solution is not limited to the standard three to five transaction elements common to other tax solutions. Sabrix is capable of evaluating a virtually unlimited number of transaction elements in order to correctly determine the taxability of a purchase transaction.
The Requisition-to-Payment Process
In order to ensure accuracy, tax determination should happen at multiple steps in the requisition-to-payment process. At each of the steps shown in Figure 1, changes or actions can be taken that have an impact on what is being purchased and from where it is being purchased that can impact the tax due on the purchase transaction. Additionally, intra-company transfers can further complicate this process when direct goods held in inventory and for which no tax was originally paid, are pulled from inventory for use internally. When this occurs, the goods become indirect and taxes must be accrued and paid.
The real need for tax decisions throughout the requisition-to-payment process in combination with the complexity of taxes on purchases, have made it very difficult to implement a fully automated solution that handles verification of tax charged by a vendor and consumers use tax accrual. Most companies still use manual processes throughout their requisition-to-payment process to manage sales and use tax. These efforts are expensive and can result in frequent errors as many of the people performing these manual processes are typically not trained in sales and use laws. The cost of both of these factors quickly adds up and can have a significant bottom- line impact.
These efforts are expensive and can result in frequent errors as many of the people performing these manual processes are typically not trained in sales and use laws. The cost of both of these factors quickly adds up and can have a significant bottom- line impact.
-- Tax Determination At All Steps
The Sabrix Solution
Sabrix provides enterprise transaction tax software and world-class U.S. and international tax research which enable a company's tax department to take control of sales and use tax requirements throughout the requisition-to-payment process and ultimately, have a positive impact on the bottom-line. The Sabrix Solution enables Tax departments to effectively manage taxes on purchases by:
- Centralizing transaction tax management for all requisition-to-payment systems simultaneously
- Providing tax rates, rules and product exceptions for all 7,600 U.S. authorities integrated with The Sabrix Application
- Delivering tax determination logic to identify which transactions are taxable and by which authorities.
- Accommodating a virtually unlimited number of data elements as input to accurately determine taxability
- Applying Exemption Certificate's when appropriate
- Recording transaction and tax data for audit information and transaction life cycle management
-- Tax Determination With The Sabrix Solution
Centralizing Transaction Tax Management
As illustrated in Figure 2, a single instance of the Sabrix Application, enterprise tax management software, can integrate with all business applications that require transaction tax determination. Additionally, Sabrix manages multiple companies, divisions and other entities, ensuring that the correct tax determination logic is applied to each transaction based on each entity's specific requirements. The Sabrix Application delivers centralized transaction tax visibility with decentralized tax department management and control. For instance, one division of a large company may purchase a specific item for repair purposes, while another division may use the same item for resale purposes. Sabrix will ensure that tax determination is correctly made for each transaction within each division.
A centralized application is critical for accurate tax determination on purchase transactions. As discussed earlier, the use of a product being purchased is generally known at the time the product is being requisitioned or purchased, yet the tax is not accrued or paid until the vendor's invoice is actually paid by accounts payable. Typically, information about the use of the product is not included on a vendor's invoice, and therefore the decision about taxability being made in accounts payable, is often incorrect.
Sabrix can serve multiple applications and record transactions in an audit file for later access. Therefore when an item is being requisitioned or purchased, Sabrix can be called upon to not only determine tax, but, to also capture intended usage. This can be utilized at the time the vendor invoice is being processed in accounts payable. Since the transaction might have changed in any number of ways from what was placed on the initial requisition, The Sabrix Application can once again accurately determine the tax, taking into consideration the usage recorded at an earlier, requisition stage.
Integration with Multiple Systems Simultaneously
One of the most significant barriers to automating use tax determination and management is that use tax determination touches multiple steps in the overall requisition-to-purchase process. As a result, there are many applications that require tax determination. A centralized tax application will insure consistent tax decisions across all the steps in the requisition-to-payment process. In order to achieve this, it is important that it is easy for each application to call Sabrix for tax decision making.
A key benefit is that the tax professional does not have to understand the transaction details for every calling application. Sabrix provides over 600 standard data elements that are common to most ERP and transaction systems and may be used in tax determination. In addition, the tax professional can define unique or custom elements.
Providing Tax Rates, Rules and Product Exceptions
Sabrix provides world-class U.S. and international tax research supporting 125 countries plus the 7,600-plus U.S. taxing authorities, and offers monthly updates on rates, rules, product exceptions, cross-border, country and state law changes, all fully integrated with The Sabrix Application.
The Sabrix Application's Tax Determination Logic
Sabrix has the intelligence within the application to evaluate all the data elements of a transaction and correctly determine taxability. Sabrix also has the ability to access data elements outside the transaction to determine taxability. This eliminates the need to code tax determination logic in multiple applications and manual systems throughout the organization. Tax determination logic is centralized in Sabrix and can be effectively managed by the tax department. The Sabrix Application provides a comprehensive, intuitive user interface designed so that the tax professional can easily configure and manage tax determination logic.
Traditional Systems Inadequacies
Traditionally, sales tax packages have provided tax calculation functions by maintaining tax rates by product by jurisdiction. What these traditional tax packages cannot do is decide if a transaction is subject to a tax, or what tax type should be applied to a transaction purely based upon transaction attributes with traditional systems, companies have three options:
- Create custom code in the ERP business application or in the Application Program Interface (API),
- Manually make the tax determination (A/P personnel),
- Create and maintain a tax table in the ERP application or purchasing system to assign a "tax code" indicating the type of tax.
Creating and maintaining custom code for tax determination logic into the various transaction applications is not only costly and difficult, IT departments can rarely keep pace with all tax change updates to all of the disparate tax engines. Manual approaches are subject to high error rates. Creating and maintaining tax tables in the number of disparate systems most companies utilize throughout the purchasing process is extremely time consuming and leads to tax inconsistencies across a company.
Accommodating an Unlimited Number of Data Elements
Consumers use tax, as its name indicates, is based upon the use of the product. In order to automatically determine how a product is being used by the organization many data elements may be used. For instance, in some jurisdictions, all items purchased for Research and Development (R&D) may be exempt from Use Tax. Therefore any purchases charged to the R&D department number may be exempt. Other jurisdictions may exempt only items used for "pure research". Therefore R&D department number may not be enough, and a cost center, job code or location address may be used.
All of these elements, and any others necessary, can be passed to Sabrix and evaluated in order to correctly determine tax. For large companies with multiple accounting or purchasing applications this can be critical, because different applications will likely have different data elements that reveal how an item is being used by the organization.
Applying Exemption Certificates
Direct purchases are not taxable because they are intended for resale, or to be used as raw materials to create a product that will be resold. Most companies will provide their vendor with an exemption certificate, so the vendor does not charge sales tax on these items. A common problem is that this same vendor also sells items to the purchaser that are indirect, or taxable, but, since the vendor has a certificate on file, they end up not charging tax on these items when they should. If the purchasing company does not catch this, and accrue and pay a use tax, they can be subject to penalties.
Sabrix provides exemption certificate management within the Sabrix Application - for managing both the company's exemption certificates as well as their customer's certificates. The centralized platform simplifies tax management because there is no longer a need to track exemption information in multiple applications, and exemption certificates can be applied appropriately and tax calculated correctly.
Facilitating Audit Support and Administration
The Sabrix audit database stores all transaction details (tax and other) processed by The Sabrix Application. This can be very important for companies that have disconnected applications involved in the purchasing process. For instance one application may generate purchase requisitions and have necessary information for use tax determination. Another application may handle all payments to vendors and have no information about the use of the purchased item. Sabrix can store information from each transaction to ensure that the correct tax determination is made.
Audits can be an expensive and tedious process, no matter what the outcome. With Sabrix, audits are simple and straightforward for two reasons:
- All information, enterprisewide, is stored in one central database
- All information that was used in the tax determination is stored along with the tax decision
The process of determining the best statistical sample and researching that sample is easy when all the information about the transaction is in one database. With The Sabrix Application, there is no longer a need to examine a statistical sample of transactions and trace them back through the purchasing process to determine exactly why goods were purchased and what the items were actually used for - all of that information is accessible in the Sabrix Database.
Improving the Bottom Line
Sabrix provides enterprise transaction tax software and world-class U.S. and international tax research which enable a company's tax department to take control of sales and use tax management. The Sabrix Solution enables tax departments to effectively manage taxes on purchases by supporting the tax determination requirements across the entire requisition-to-payment process. The result is accurate compliance with U.S. financial requirements and reduced tax costs that can return millions to the bottom line.
