Years ago when working in the Accounts Payable Department for Reynolds Metals Company headquartered in Richmond, VA, one of my regular duties was that of the Program Administrator for the new Corporate and Purchasing Card programs. Back in the early 90’s, Card programs were just making their appearance as a new form of payment. And, having a new form of payment helped uncover issues not really thought about before in the business world.
One of the many issues that reared its ugly head was how to ensure the sales and use tax was correctly paid. I have to disclose that tax understanding is not my strong point and typically, not normally an expertise of those in charge of paying company bills every day. And, I admit it, I am the person who pays to have my tax returns done because tax is not my forte’. However, I am one of those people when faced with something that causes a lot of work for me or others, I usually try to figure out how to eliminate the extra work.
In my opinion, most companies are not doing a good job up-front when paying, or not paying, taxes when paying invoices on behalf of the company. And, this process of ‘guessing’ about taxes made the tax department leery of the process and would have to review the invoices to ensure tax was paid properly. This practice of tax payments had become very costly to my employer, and I wanted to do what I could to help alleviate this issue.
When the tax department employees would come into our department and gather invoices to make corrections, we never would never understand how the back-and-forth of people would correct or elevate the tax situation. Our department was usually either left with the invoice to file back in the correct place, or the invoice was filed by the tax person – but often times, in the wrong folder and sometimes, critically lost for a period of time, which is never good.
I remember trying to understand all of the tax rules for each state. Alas, the rules and regulations changed all the time and still does today. Hopefully, most companies are using a tax solution interface, but in my experience, many companies still are having tax strategy issues and not even thinking of the cost implications. One thing for sure, there is no tax solution that is 100% perfect, but there does need to be some kind of strategy in place.
Card Payments and Tax
Card payments typically bypass the usual ERP (Financial System) tax logic. A lot of companies will take card transactions and process them directly to the general ledger (GL) (final post). I suggest a company bring their card transactions into AP first to ‘bump’ any transactions against tax solutions, inventory and/or fixed asset systems before doing a final GL entry.
One of the things I have discovered in all types of industries is the common practice that if tax is paid at point-of-sale, nothing else needs to be done to collect tax or ensure tax is correct. But, as a consultant today, I can safely say that just because tax is charged at point-of-sale does not negate the obligation to the company to pay the correct amount of tax. Trust me, if you are audited, you do not want your company to be in a position to have to pay a lot back, or to realize you have paid too much, therefore negatively affecting the working capital of a company.
‘Ship To’ Issues
There are times when the purchase should be considered tax-exempt or, there may also be a ‘ship to’ tax (meaning if purchased in one state but shipped to another state, the tax should be paid to the state the item is actually used). Tax-exempt can be confusing because, for example, purchasing a book can be taxable, but if the book is used for research, it is considered tax exempt. And, sometimes in Accounts Payable, it is impossible to know what the purpose may be for a purchased item. As you can see, there is so much that goes into paying bills for a company.
Consideration for ‘ship to’ is common when ordering online. One item ordered by my company that really confused the ‘ship to’ situation was having a centralized person ordering business cards from one location but, shipping the cards to various different states.
I manually checked each card purchase for 1400 cards and tried to make adjustments to ensure our tax was paid correctly. I asked my Director if I could talk to him about the sales and use tax dilemma. When explaining the hours of work I was doing to ensure the card taxes were paid correctly (rather that I tried to pay correctly), the Director, knowing me very well, asked me if I had an idea of how to solve the issue.
A Better Way
Keep in mind that in most companies I have worked for, when you present an issue, you should have some thought as to how the situation can be solved. This is a best practice for any professional who wants to progress their career. And, I did have an idea brewing in my head to help solve the issue.
The Director told me that the Tax Auditors from the state happened to be onsite with our tax team. So, I called the tax department to see if I could visit with the auditors to talk about a possible solution.
When meeting with the outside auditors, my thought was that the company I worked for had been in business for years and I would assume it was known what the average sales and use tax was paid on a monthly basis. The thought was to use the power of the ERP system to solve the tax issue.
We reviewed each expense type used for paying bills. We assigned each expense type as either taxable or not taxable. Therefore, as each payment was processed, the selection of the expense type decided on the tax liability automatically.
On a monthly basis, the ERP system auto calculated the tax payment based on a tax percentage. The tax percentage was given to us after the tax auditors determine a good percentage rate after an audit of our sales/use tax payment for the past three years. After we were up and running with the new strategy, the auditors came back every three years and adjusted the percentage if needed.
We provided all of our suppliers and cardholder with tax-exempt certificates and self-assessed our own taxes. The tax payments were accrued and paid based on the ERP calculation monthly. By creating this solution, we automated not only the card payment transactions but all of our payments in Accounts Payable.
Impact on the Tax Team
We had an entire floor dedicated to tax, however, because of this solution, it cut staff dramatically. Cutting staff was not something I set out to do however, we did create a slick tax solution that then took on the name in the industry of “macro” tax or “estimated” tax.
The tax department did think it was a great solution and asked me to speak to the National Tax Institute about this new solution. Can you believe it? The person who hates tax was now telling the Tax Institute what I came up with to help with an ever-growing issue that not even they had thought about to solve.
After I had successfully created and implemented this new tax solution, I heard about the tax idea at the next International Accounts Payable (IAPP), (now known as the Institute of Financial Operations (IFO) conference. The outside audit firms had heard about this solution and it became one of the tax strategies that could be considered by businesses.
As a disclosure, I am not a tax expert, and always ask that you seek advice from your tax experts and lawyers before making any kind of changes to your tax strategy. However, please do have some kind of tax strategy, and do not rely on what is charged from your suppliers as being correct. If ever audited, you will run into issues and may need to pay back money if not done incorrectly or, that you may have paid too much to your suppliers and need to recoup the money for your company.
Editor’s Note: This Article originally appeared on Women’s Voices Magazine and is featured here with Author permission.