Charles P. Maniace and Kristin Korpos, ADP Taxware
In our first article, we discussed the risks associated with overpaying transaction tax on your organization’s purchases. By way of a quick review, sales tax laws are complex, both because of the number of taxing jurisdictions throughout the world (8,800 in the U.S alone) and because of the confusing laws, rules, and regulations that purport to distinguish between what’s taxable and what’s exempt. As a purchaser, you can never be 100% certain that your vendor is calculating tax correctly. If they are not, that money (often a lot of money) comes directly out of your pocket and may never be recouped. We also discussed the limited option of utilizing direct pay permits, which sometimes allow purchasers to self-assess tax on certain acquisitions.
In this article, we examine several techniques to verify tax liability on the purchase side that have broader applications than direct pay permits. Our review begins with the manual process of invoice verification, and moves to the more automated process of tax tolerance processing. We will also discuss how a transaction tax calculation engine may help in implementing the necessary controls to ensure you never pay more tax than absolutely required.
Invoice verification is a manual process of verifying your vendors’ transaction-tax calculations. It is as simple as it sounds. For example, you might cull out those invoices that exceed a certain dollar amount or those relating to certain tricky items, or those that come from a vendor you suspect is not particularly good at calculating tax. You would then manually examine those invoices and check their tax calculation against yours. If the numbers are inconsistent, you and the vendor would come to a mutually agreeable tax determination.
Without question, a manual process is time intensive and subject to human error. It also means expending valuable time and resources that could be invested back into the business. On the other hand, invoice verification is simple, certain, and flexible. You only need examine those few invoices you separated out from the pack. If your purchase volume is very low, invoice verification may very well work for you. But, for most businesses, automating the process is far more appealing.
Tax tolerance processing is invoice verification taken to the next level. For this method, your organization will need a tax calculation engine—which can also be used to calculate tax on your purchases. (Our next article will discuss in more detail the benefits of acquiring a tax calculation engine.)
Essentially, a user runs their purchase-side transactions through the engine. Based on relevant parameters (e.g., ship-to address, location of use, type of product, date of acquisition, etc.) the tax engine then determines the applicable tax rate and applies it to the sales price.
The tax amount is then automatically compared to the amount on the vendor’s invoice. Ideally there will be no discrepancy. But experience tells us otherwise, which leads to the question: how often do you want to argue with your vendors about tax? If you are particularly aggressive, you could review every invoice where there is a discrepancy. However, most organizations will set a tolerance within their automated system. For example, they may specify that unless the tax calculated exceeds the tax invoiced by a certain dollar amount or a certain percentage, the invoice will be paid without questioning the tax. The automated system simply allows the invoice to pass through the system for payment. So, only those transactions that exceed the pre-set tolerance level will be moved to a suspend file for further review prior to payment.
In the third and final article of this series, we will review the Evaluated Receipt Settlement Process and provide additional information on how a tax calculation engine can be used to save time, money, and manpower.
About the Authors
Senior Tax Counsel
Charles Maniace is an attorney who is involved in monitoring the progress of the Streamlined Sales Tax Initiative. He has made presentations on a variety of tax topics including Sarbanes-Oxley, drop shipments, the taxation of high technology transactions, and the growth of sales tax holidays.
Associate, Tax Research
Kristin Korpos, Associate, Tax Research at ADP Taxware, holds a bachelor's degree from Drew University and a doctorate from the New England School of Law. Her background also includes Northeastern University's Graduate School of Professional Accounting where she earned both a master's in business administration and a master's in accounting. Prior to joining ADP Taxware, she worked as a Tax Consultant with Deloitte & Touche.
The authors work at ADP Taxware, part of ADP’s Employer Services Division.
Automatic Data Processing, Inc. (NYSE: ADP), with nearly $8 billion in revenues and over 600,000 clients, is one of the world's largest providers of business outsourcing solutions. ADP Taxware, part of ADP Employer Services, provides compliance solutions to calculate sales, use, and value-added tax for businesses of all sizes.
Invoice verification is simple, certain, and flexible.
IN THE NEWS
The AAPA and CyberShift are teaming up to present “Ensuring Your Automated Travel & Expense Reimbursements Meet the IRS’ Requirements,” a free webinar. The webinar will also focus on finding ways to combat quickly rising business travel costs. The webinar is scheduled for Thursday, September 4 at 2 p.m. ET. Click here to register and reserve your seat for this informative event.
The one-hour webinar, taking place during National Payroll Week, will be presented by Jim Medlock, CPP, Director of Education and Training for the APA and Craig Fearon, Senior Product Director, Expense, for CyberShift. Medlock and Fearon will interweave their respective presentations, and will also set aside time for a question and answer session.
“The topic of travel and entertainment expenses is definitely of interest,” said Laura Hills, Vice President of Marketing for CyberShift. “Managing travel and entertainment expense from a legislative or compliance perspective as well as improving cost control is top of mind for many organizations today.”
Citing "recent gasoline price increases," the IRS has increased the standard business mileage rate from 50.5 cents to 58.5 cents a mile for all business miles driven between July 1 and December 31, 2008. The rate for deductible medical or moving expenses is increased from 19 cents to 27 cents a mile. Note: The rate for providing services for charitable organizations is set by law, not by the IRS, and remains at 14 cents a mile. Read the news release from IRS.