AP Journal Online. American Accounts Payable Association.

Part III: The Evaluated Receipt Settlement Process and the Benefits of Transaction-Tax Software Automation

This third and final installment concludes our discussion of how companies can reduce their costs by eliminating overpayment of sales tax on purchase transactions. By way of a quick recap, our first installment detailed the complexity of sales tax laws and the financial risks associated with overpayment. We also discussed the limited availability of direct-pay permits which allow certain purchasers to self-assess tax on specific transactions. In the second installment, we explored several techniques that purchasers may deploy to verify tax liability, including manual invoice verification and tax tolerance processing.

In this article, we will examine Evaluated Receipt Settlement (ERS), an electronic process by which the purchaser calculates tax as if they were the vendor/supplier issuing the invoice. We will also discuss the benefits using transaction tax software on the purchase side.

Evaluated Receipt Settlement

In the ERS process, a vendor allows the purchaser to calculate tax on their behalf. That makes this process unlike anything we have discussed before. It cannot be deployed unilaterally. Rather, it is an agreed-upon process between the seller and the buyer. Why would a vendor consent to transferring its tax collection obligation to their customer? The answer lies in recognition of the difficulties in calculating tax properly combined with confidence that their purchaser has implemented processes to determine the correct rate and tax.

Once the agreement is reached, the vendor sends the purchaser their catalog or price list. When the customer wishes to make a purchase, a standard purchase order that specifies the product, quantity, and price is produced and sent to the vendor. Instead of creating an invoice after the delivery of the product that contains a tax calculation, the vendor electronically acknowledges the order with an Advance Shipping Notice (ASN).

Next, the vendor ships the item with an itemized bill of lading or packing slip that references the purchase order. This notice does not include tax or pricing information. When the item is received, the purchaser verifies the accuracy of the shipment against the ASN. Then, based upon the price contained in the catalog or price list, the purchaser runs the transaction through their tax calculation process and remits the full amount due combined with the correct tax, to the vendor without ever receiving an invoice. The vendor retains their responsibility of remitting tax to the relevant state or local jurisdiction.

The most challenging aspect of the ERS process is knowing where your vendor has a sales or use tax collection obligation. In tax terminology, there is a concept known as nexus. Under the law, a seller is required to collect sales tax in any jurisdiction where it has a physical presence. When a seller does not have a physical presence, the purchaser may still have a tax liability, but it is known as a use tax. However, when a use tax is due it becomes the purchaser’s obligation to self assess and remit use tax, not the seller’s responsibility. For example, if an item is being shipped to a location where your vendor does not have nexus, the ERS process should not be applied. Instead of remitting tax to the vendor, the purchaser must self-assess and remit use tax themselves.

Aside from always getting the tax right, ERS also reduces the paperwork associated with standard invoice processing. In addition, since the purchaser is no longer waiting for an invoice, they may also be able to take advantage of any available prompt-payment discounts.

Transaction Tax Software

During our discussion of invoice verification and tax tolerance processing, we began to consider the benefits of using a transaction-tax calculation engine on the purchase side. Transaction tax software is traditionally integrated with a company’s accounting system or Enterprise Resource Planning (ERP) system. Once the integration is complete, the software uses price and location information extracted from the ERP to determine the appropriate tax due. Most importantly, instead of maintaining the research in-house, content contained in the engine will determine the appropriate taxing jurisdiction, the correct rate, and apply any product-specific rules or exemptions.

As described above, ERS can only be implemented with mutual consent and, from a seller’s perspective, it should only be implemented in those circumstances where they can completely trust the purchaser to perform accurate tax calculations. A purchaser that employs a transaction-tax calculation engine can readily provide that assurance.

Conclusion

In summary, almost every organization would benefit from adopting some process that confirms you are paying precisely the right amount of sales tax on your purchases. The method you ultimately choose depends largely upon your business needs, resources, and desire for automation. Given the sheer number of jurisdictions, the complexity of the law, and the fact that everything could change with a moment’s notice, the utilization of an automated tax-calculation engine is an appealing alternative to in-house research.

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 the widest range of HR, payroll, tax, and benefits administration solutions from a single source. ADP's easy-to-use solutions for employers provide superior value to companies of all types and sizes. ADP is also a leading provider of integrated computing solutions to auto, truck, motorcycle, marine, and recreational vehicle dealers throughout the world. For more information about ADP or to contact a local ADP sales office, reach us at 1 (800) 225-5237 or visit the company's Web site at www.ADP.com.

ADP Taxware, part of ADP Employer Services, helps businesses of all sizes to completely automate their sales tax process. For more information about ADP Taxware products, please visit www.adptaxware.com or call 877-TAXWARE (829-9273).

Why would a vendor consent to ceding its tax collection obligation to their customer?

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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.

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