This week, our blog series features tips and tricks on segregating tax, freight and discount so you can add accuracy and value to your procurement-side tax automation.
Our last blog post, Batch Is Better Than Real-Time, kicked off our blog series, 10 Best Practices for Procurement-side Tax Automation. This week its about becoming a student of your data.
This blog is the first of a ten part series focused on the most important considerations for procurement-side sales and use tax automation. The blog series kicks-off with our topic, batch is better than real-time.
Understanding your data is extremely important, especially when it comes to your sales and use tax. Below are questions to ask yourself to get the ball rolling:
- What ERP do we use?
- What are the different modules within the ERP?
- What fields are stored in each module?
- What information does each field provide about the purchase?
- What information is stored in detail or summary?
- What fields will link the summary information with the detail?
- What information is required verses optional?
- What information is manually generated or inherited from a different module?
- Are there subsystems that interface with the ERP?
- What fields will link the information between the subsystems and ERP?
- Does AP segregate and store vendor tax?
- Is segregated and stored vendor tax at the line or summary level?
- Does AP segregate and store vendor discounts?
- Is segregated and stored vendor discounts at the line or summary level?
- Does AP segregate and store freight charges?
- Is segregated and stored freight charges at the line or summary level?
Are you struggling to answer these questions and dig deeper into your data? Now more than ever, it is critical to know the intricacies of your data so you can set your company up for success. Read more to learn about the next two steps you should take after understanding your data.
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STEP 1: KNOW YOUR DATA
Gone are the days of hoping your data will suffice under audit. Hope is not a strategy, but education is. A great way to educate yourself is by identifying, contacting, and meeting with those people in your organization who live and breathe the data on a daily basis. Valuable information can be gained from any of your organization’s functional groups, but Accounts Payable, Procurement, Accounting, Operations, and IT should definitely top your list. Try to schedule an hour meeting with a key member of each these groups, and you’ll be amazed by how much useful information you’ll learn about your data. While meeting with them, don’t be afraid to get specific, as the devil usually lives in the details.
STEP 2: CAPTURE YOUR DATA
Once down the path of learning more about your data, your next step is properly capturing it. Here you should be thinking about two separate things. First, does the organization have all of the information needed to successfully defend tax positions under audit (e.g., segregated sales tax, line detail, etc.)? If not, it’s good to perform a high-level analysis to determine the potential financial impact the missing data may
have on the organization. If your analysis demonstrates a clear business case, you should jointly meet with Finance and IT to present your findings and push for the data change. Next, you need to consider how the data is going to be pulled. Are you going to be self-reliant, or do you plan to leverage IT to push the data on demand? If you plan to leverage IT, it’s always good to mock up some sample reports to better convey the exact deliverable(s) you need from them. Make sure your samples includes all pertinent fields, examples of how certain information may need to be rolled up, and descriptions for any codes that may be included in the report (such as GL account descriptions, cost center descriptions, commodity code descriptions, etc.). If you’re going to be self-reliant on capturing the data, you need to determine if you have the proper tools that will allow you to be successful. For example, do you have access to the necessary queries, databases, and/or tables needed to extract the data out of the system? If so, do you also have access to the proper tools to potentially manipulate the data upon request? Even though MS Excel has done a great job overcoming their historical volume limitations, you might find that it’s still not ideal for manipulating the larger data sets that are usually required during audits. Most self-reliant tax practitioners tend to leverage more robust data analysis programs for this type of work, such as MS Access, ACT, or ACL.
STEP 3: REVIEW YOUR DATA
Once you have the ability to pull the data, it’s vital to review it on a regular basis. The frequency of your reviews will obviously vary based upon the size, complexity, and the overall needs of the organization, but you should plan to review it at least once a quarter. In reviewing your data, you should be looking for data anomalies, coding errors, omissions, and any other trends that could cause the organization to quickly fall out of good compliance with a taxing jurisdiction. The purpose of the review is not only to stay abreast of how the data will change over time and by user, but also to promote internal training and/or external vendor awareness before any errors get out of hand. In this day and age, it pays to become a student of your data. The more you can learn about how it originated, how to pull it, and how it changes, the better.
Being aware of your data is one of the most important things in an emerging digital landscape. Without data, it’s impossible to gain a deeper understanding into the processes needed to help your business run. Not only do potential problems go unnoticed, until they bubble over into serious issues, it’s harder to protect your company against business risks when you’re unaware of the specific details in your data. This is especially true within the corporate tax department. When tax practitioners don’t understand the specifics of their data, the company’s risk of non-compliance with federal, international, and state and local tax codes can skyrocket.
Not all costs associated with data unawareness can be measured from a monetary standpoint, as there are also reputational risks at stake. If your business is regularly found to be non-compliant, due to your inability to access and/or understand your data, your company’s credibility may diminish within your industry. People associate data awareness with success and best practices, so not having control in that area of your business can be a serious problem.
When one can’t capture data accurately or efficiently, the ability to perform a good risk-related trend analysis can be lost. You are also unable to gain a deeper understanding of the overall landscape your company may face to be at the forefront of your industry, especially when you consider that good data awareness has the potential to generate up to 70% more revenue for your company. When it comes to business growth and stability, a deep awareness of data and its meaning is extremely vital.
According to IBM, both inaccurate data and inefficient data methods costs businesses $3.5 trillion a year. The problematic data comes in the form of duplicate entries, inaccurate entries, typos and omissions in key fields. The inefficiencies generally come from workers spending up to 50% of their time just trying to find and correct problematic data. Within the United States, the lost productivity costs alone are estimated to be $60B a year. Freeing up that amount of time and money can allow your business to utilize those resources and invest them in other areas of the company to promote growth.
If you can’t accurately capture and analyze your company’s data, you’re bound to fall behind the pack when it comes to business growth and stability. You risk losing opportunities for new customers and/or product development, which has found to be as much as 12% of a company’s total revenue.
There is no downside to effective data management, but there are serious risks when it comes to ignoring one of the biggest tools available to your business. In the current digital landscape, data management can make or break a company – don’t be left behind.
Accuracy, simplicity and affordability are the cornerstones of good tax automation. Although many companies devote resources to calculate sales and use tax, they often struggle to do so within an acceptable error rate. The implicit details surrounding each individual transaction, along with the volume of changes by the various legislative bodies and the lack of critical information at the time of purchase, are just a few main reasons why so many have serious problems in this area.
Many of your vendors, in addition to online retailers, are now required to collect sales tax even though they lack physical presence.
Most of the media coverage, consultants, and blogs have focused on Wayfair’s ramifications on companies that now need to start charging sales tax on sales. This is a concern for thousands of companies. However, I think most published guidance will not address a different risk caused by thousands of companies starting to charge sales tax.
On June 21, 2018, the United States Supreme Court ruled in a 5-4 decision in South Dakota v. Wayfair, Inc., et al, that the physical presence test under the 1992 Supreme Court case (Quill Corp v. North Dakota (504 U.S. 298)) no longer applies to the obligation to collect and remit sales tax on sales to customers in a state. In other words, a company can now be required to collect sales tax by simply selling over the internet or by using any other method, regardless of whether the company or its representatives ever step foot into the state. The ruling is in respect to South Dakota’s law, but almost all states are following.
What Does This Mean?
In a rush to comply with State’s legislation and the Wayfair ruling, thousands of companies will hastily implement processes to charge sales tax. That tax will often be incorrect because these companies lack the appropriate information or systems to properly calculate the tax. Keep in mind that vendors new to collecting will often NOT use appropriate location (situs) information to tax services or determine whether a transaction is an interstate or intrastate purchase of tangible personal property. Vendors will likely NOT know how you use tangible personal property and will NOT have your exemption certificate. These are a few examples.
What Should I Do?
Companies should review all purchase transactions where sales tax was charged by the vendor. Try to identify new vendors and vendors that recently started charging sales tax. For those transactions, recalculate the sales tax on the entire invoice and compare to what the vendor charged. Correct the payment or take corrective action in the current month’s compliance if possible.
A best practice is to automate this procedure If your company has significant purchase transactions. DTS’ TaxView PRO can help. If you are interested go to www.dtstax.com. To contact us, click the link below or call me at (706) 467-0071.