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
Feb. 26, 2013
Mike Dillon, Dillon Tax Consulting
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
Slide 28 – Slide 35
Slide 13 – Slide 24
Slide 25 – Slide 27
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
Mike Dillon, Dillon Tax Consulting
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
Mike Dillon, Dillon Tax Consulting
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
Improved Processes And Interactions With Systems (Cont.)
• 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
Improved Processes And Interactions With Systems (Cont.)
• 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
Improved Processes And Interactions With Systems (Cont.)
• 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
Slide Intentionally Left Blank
Improved Processes And Interactions With Systems (Cont.)
• 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
Improved Processes And Interactions With Systems (Cont.)
• 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
Improved Processes And Interactions With Systems (Cont.)
• 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
Improved Processes And Interactions With Systems (Cont.)
• 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
Improved Processes And Interactions With Systems (Cont.)
• 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
Mike Dillon, Dillon Tax Consulting
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
Slide Intentionally Left Blank
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
Slide Intentionally Left Blank
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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