AP Journal Online. American Accounts Payable Association.

Part I: The Cost of Transaction Tax Miscalculation

Even though it’s often overlooked, the financial impact on an organization from overpaying sales and use tax liability can be substantial. However, it’s possible to take steps from an accounts payable perspective to limit that exposure. By implementing a system that verifies tax liabilities, companies can potentially save millions of dollars and minimize audit exposure by ensuring that they only pay as much tax as they owe. This series of articles will explore some of the techniques for confirming sales and use tax liabilities, such as utilizing direct pay permits, invoice verification, tax tolerance processing, and evaluated receipts settlement (ERS). We will also focus on how a transaction tax-calculation engine may be used to perform this sometimes time-intensive process on an automated basis.

The risks associated with under-collecting transaction tax (sales tax, use tax, and value-added tax) on taxable sales are known and easily understood. Most tax managers who have faced a sales and use tax audit know that they are not only responsible for paying any uncollected tax, but they are also liable for corresponding penalties and interest. However, many organizations are unaware that there is equal financial risk on the purchase side. While it’s easy to assume that a supplier is diligent in determining the proper taxability of their own items, that level of trust may not be warranted.

Quite simply, getting the right rate and the right tax is extremely complicated, but getting it wrong can be very costly. An ADP Taxware client recently hired an outside consulting firm at a cost of $400,000 to review tax payments on the purchase side. An overpayment of $1.5 million was discovered.

Sales tax laws throughout the world reveal a cavalcade of ever-changing special rates, exemptions, and other assorted taxability rules. Given that there are more than 8,800 taxing jurisdictions in the U.S. alone, it’s virtually impossible to keep track of everything. Many U.S. jurisdictions apply up to four levels of sales tax (state, city, county, and district). In Texas, for example, this means that certain localities can have a total sales tax up to 11%. In real dollars, this means that a single purchase of $1,000,000 could be subject to $11,000 in sales tax. If you engage in transactions outside the U.S., the tax expense is even greater, with rates in some European countries as high as 25%.

In this environment of complex taxes and high rates, there are essentially four approaches an organization can take to confirm that the proper tax is being collected on their purchases.

• Self-assessing use tax through direct pay permits
• Invoice verification
• Tax tolerance processing
• Evaluated receipt settlements

Each method offers varying degrees of complexity, accuracy, and automation, and we will explore each in turn.

Direct Pay Permits

Many jurisdictions (both state and local) in the U.S. allow purchasers to utilize a “direct pay permit” which authorizes them to purchase certain items without remitting tax to the vendor. In lieu of paying sales tax to the vendor at the time of purchase, the certificate holder is permitted to self assess and remit tax at the time they make the first taxable use of the product. By using a direct pay permit, a business is able to directly control their own tax liability, and take the necessary steps to ensure that they are paying the exact amount of tax owed. However, this method is subject to significant limitations. First, while direct pay permits are available in many states, they are not available in all states. Secondly, even when they are available, states often restrict the types of sellers that can obtain a permit. Finally, and perhaps most importantly, if a buyer does utilize a direct pay permit, the entire tax remittance obligation rests on their shoulders. Not only do they have to compute the correct tax, but they will also have to remit the tax to the relevant taxing authorities.

In the next article in this series will continue to examine techniques to verify tax liability on the purchase side, with an emphasis on utilizing transaction tax software to automate the process.

About the Authors

Charles Maniace

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.

Kristin Korpos

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.

About ADP

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. Leveraging more than 55 years of experience, ADP offers Human Resources, payroll, tax, and benefits administration solutions from a single source. ADP Taxware, part of ADP Employer Services, provides compliance solutions to calculate sales, use, and value-added tax for businesses of all sizes.

Quite simply, getting the right rate and the right tax is extremely complicated, but getting it wrong can be very costly.

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IN THE NEWS

Sign Up for a FREE Automated T&E Webinar on Sept. 4

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.”

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IRS Increases Business Mileage Rate to 58.5 Cents on July 1

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.