evaluated receipts settlement (ers) and tax compliance · evaluated receipts settlement (ers) and...

Evaluated Receipts Settlement(ERS)

and Tax Compliance

A Report of the Steering Committee

Task Force on EDI Audit and Legal Issues

for Tax Administration

Federation of Tax Administrators444 North Capitol Street, NW - Suite 348

Washington, D.C. 20001Telephone: (202) 624-5890

CONTRIBUTING ORGANIZATIONS

Federation of Tax Administrators444 North Capitol Street, NW, Suite 348Washington, DC 20001Telephone: 202/624-5890Telefax: 202/624-7888Internet: http://www.taxadmin.org

Committee On State Taxation122 C Street, NW, Suite 330Washington, DC 20001-2109Telephone: 202/484-5222Telefax: 202/484-5229Internet: http://www.statetax.org

Institute for Professionals in TaxationOne Capital City Plaza3350 Peachtree Road, NE, Suite 280Atlanta, GA 30326Telephone: 404/240-2300Telefax: 404/240-2315Internet: http://www.ipt.org

Multistate Tax Commission444 North Capitol Street, NW, Suite 425Washington, DC 20001Telephone: 202/624-8699Telefax: 202/624-8819Internet: http://www.mtc.gov

Tax Executives Institute1001 Pennsylvania Avenue, NW, Suite 320Washington, DC 20004-2505Telephone: 202/638-5601Telefax: 202/638-5607Internet: http://www.tei.org

FOREWORD

The Task Force on EDI Audit and Legal Issues for Tax Administration (Task Force)was formed to coordinate efforts between the business community and tax administra-tors in analyzing and addressing the issues posed for tax administration by electronicdata interchange and related business processes. The Task Force is comprised of repre-sentatives of the Committee On State Taxation (COST), Institute for Professionals in Taxa-tion (IPT), Tax Executives Institute (TEI), Multistate Tax Commission (MTC), and Fed-eration of Tax Administrators (FTA), and commissioners from several state tax adminis-tration agencies. This report is the fourth in a series of reports to be published by theTask Force on issues relating to electronic commerce, emerging business processes andtax administration.

Through the Task Force process, the Electronic Business Processes work group wasformed to examine the tax administration and compliance issues associated with certainemerging business processes, including the use of evaluated receipts settlement (ERS).A large group of taxpayer representatives and tax administrators gave freely of theirtime in an effort to understand the issues involved and to identify solutions which wouldmeet the needs of both taxpayers and tax administration agencies.

This report is the product of that effort. It describes the ERS process and the benefitsderived by its use. It identifies audit and recordkeeping issues, the type of accountinginformation created and retained, and outlines potential solutions that would be helpfulin addressing the issues raised by the use of ERS. As with the report itself, the recom-mendations are premised on a need for all parties to work together to resolve the issues.

The Steering Committee wishes to acknowledge the contributions of all individualswho devoted their time and effort in developing and refining this report. A completelist of participants can be found in Appendix E.

Stanley R. Arnold, Steering Committee ChairCommissioner, New Hampshire Department of Revenue Administration

September 1998

CONTENTS

Introduction .......................................................................................................... 1

Evaluated Receipts Settlement (ERS)What Is It?............................................................................................................. 2

How Does It Work? .............................................................................................. 2

Why ERS? ............................................................................................................. 3Streamlining Business Processes................................................................ 3Better Supplier Relationships ..................................................................... 3

Impact on Recordkeeping .................................................................................... 3

What Tax Issues are Created by the Use of ERS? ............................................. 4Issues Common to EDI and ERS................................................................ 4Issues Unique to ERS ................................................................................. 4

ERS Business Models ........................................................................................... 5

ERS - Tax Methodologies and Processes ............................................................ 5Types of Transactions and Definitions ....................................................... 5Tax Verification - Traditional Invoice......................................................... 5Use Tax Accrual - Traditional Invoice........................................................ 6ERS - Tax Calculation/Verification ............................................................ 7

ERS - How Do Taxing Authorities Audit in This Environment? ..................... 8

Potential Solutions to ERS Issues........................................................................ 8

Appendix A - ERS Business Models.................................................................. 11Appendix B - ERS Sample Questionnaire ........................................................ 12Appendix C - ERS Master Agreement Example Tax Clause.......................... 14Appendix D - EDI Transaction Sets .................................................................. 16Appendix E - List of Steering Committee and Work Group Members......... 17

EVALUATED RECEIPTS SETTLEMENT AND TAX COMPLIANCE

A Report of the Steering CommitteeTask Force on EDI Audit and Legal Issues for Tax Administration

Introduction

On October 7, 1994, the Federation of TaxAdministrators (FTA) hosted a meeting tobegin the process of forming a task force ofstate and private sector tax administrators toaddress Electronic Data Interchange (EDI).

On May 2, 1996, the steering committeeof the task force met to discuss several addi-tional issues related to electronic businessprocesses utilized by taxpayers and tax au-thorities. Based on these discussions, thesteering committee formed two new workgroups to review issues and develop recom-mended procedures for taxpayers and taxauthorities to follow. One of these groups,the Electronic Business Processes work group,is focusing on business issues such as corpo-rate procurement cards, evaluated receiptssettlements, exemption/resale certificates,and direct pay permits.

The objective of this work group is to de-velop white papers that outline the issues anddiscuss possible options for taxpayers andtaxing authorities to follow to ensure the nec-essary documentation is available for tax com-pliance and tax audits.

Evaluated Receipts Settlement (ERS), alsoreferred to as Auto Pay, is a relatively new

“business process” which is growing in popu-larity in the business community. In devel-oping this white paper, the work group iden-tified the following areas: (1) how this pro-cess works, (2) why taxpayers are increasinglyusing ERS, (3) the issues created by the use ofERS, and (4) potential options to ERS use.

The ERS white paper represents the con-siderable work product of a large number oftax administrators and taxpayer representa-tives. Since ERS is a relatively new businessprocess, this work group urges state tax ad-ministrators to educate their audit groups inthis area. Traditionally, the obligation to cal-culate and remit sales tax is imposed on thesupplier. Since the supplier no longer hascomplete control over the tax calculation func-tion when using ERS, this becomes more com-plicated. However, it is important that thesupplier realize that he still has primary taxresponsibility and is not relieved of his obli-gations. The recently issued Auditing Elec-tronic Data white paper by this task force pro-vides general guidelines that are applicableto auditing ERS transactions. However, thereare notable variations from electronic datainterchange (EDI) that could raise audit is-sues. Thus, education of the audit workforceis critical to an efficient and effective tax ad-ministration process.

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Evaluated Receipts Settlement and Tax Compliance

Evaluated Receipts Settlement (ERS)

What Is It?

ERS is a business process between trad-ing partners that conduct commerce withoutinvoices. In an ERS transaction, the supplierships goods based upon an Advance ShippingNotice (ASN), and the purchaser, upon re-ceipt, confirms the existence of a correspond-ing purchase order or contract, verifies theidentity and quantity of the goods, and thenpays the supplier.

How Does It Work?

A supplier and its purchaser enter into anagreement to use evaluated receipts settle-ment. The supplier keeps the purchaser cur-rent with price/sales catalogue data fromwhich the purchaser extracts accurate prod-uct and pricing information during the pur-chasing cycle. The supplier delivers the ASNto the purchaser, permitting loading/receiv-ing docks to be properly scheduled and ac-curate material receipts to be generated. Thepurchaser authorizes supplier payment uponconfirmation of arrival of goods, making theinvoice redundant.

Although there are numerous variationsof how ERS specifically works, there are sev-eral common elements:

1. Pricing Information – A list or catalogueof products and prices is sent by the sup-plier to its purchaser. The information hasan agreed upon “shelf life” (30 days, 60days, etc.). This pricing information maybe sent to the purchaser electronically,faxed, or in a paper form. In some cases,it becomes a part of the written contract.

2. Products/Goods Ordered – A purchaserusing the pricing information sent by thesupplier places an order.1 Usually a pur-chase order specifying quantity, producttype, price, freight, tax, etc. is generated.This purchase order may be sent electroni-cally (EDI), via fax, or paper. This pur-chase order has a unique number for thespecific order. Some purchasers do notissue a purchase order but rather placetheir goods order pursuant to the specificterms and conditions of a contract. Thespecific contract number is referenced.The order may be placed via EDI, fax, pa-per, or verbally.

3. Advance Shipping Notice (ASN) – A sup-plier acknowledges the order by sendingan ASN to the purchaser. The ASN is usu-ally sent electronically to the purchaser.In an EDI environment, ANSI X12 Trans-action/Data Set 856 (Ship Notice/Mani-fest) is used. Note that transaction set 856does not contain pricing or tax informa-tion.

4. Goods/Products Shipped – The supplierships the goods with an itemized bill oflading or packing slip which referencesthe purchase order or contract number.

5. Validation/Matching Process – The pur-chaser matches the goods receipt (bill oflading, packing slip) to the ASN, purchaseorder, or contract to validate accuracy.

6. Payment Process – Instead of respondingto a supplier’s invoice, the purchaser cal-culates payment based on price informa-tion stored in their computer. Price up-dates may be logged into the purchaser’scomputer either manually or through EDImessages sent by the supplier. The type,quantity, and condition of the goods re-

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ceived are entered either manually into thepurchaser’s computer or through the useof bar codes. The computer system calcu-lates the payment amount due by multi-plying the unit price times the quantityreceived, accrual or payment of tax, andalso takes pricing terms into account. Thegoods receipt date is used as the basis fortaking discounts and determining the duedate of the payment. The payment ismade either by electronic funds transfer(EFT) or check.

Why ERS?

There are numerous benefits for both thesupplier and purchaser who use ERS. Thetwo main categories are summarized as fol-lows: (1) ERS aligns with the reengineeringor streamlining of business processes. (2) ERScreates better relationships with suppliers.

1. Streamlining Business Processes

The reengineered purchasing and pay-ment process associated with ERS results inreduced costs, reduced errors, and eliminatesnon-value-added activities.

a. Reduced Costs – ERS often requiresless manpower resources, equipmentand floor space, and eliminates lostdiscounts and the costs to create andprint invoices.

b. Reduced Errors – Because there is lesshuman intervention, fewer errors re-sult. Checking purchase order num-bers, quantity, pricing discounts, etc.are now automated.

c. Non-Value-Added Activities Elimi-nated – Mail opening, data entry, fil-

ing of invoices, voucher paymentpreparation, follow-up of uninvoicedreceipts (lost invoices), mail float, cycletime, microfilming, cost of matchinginvoice to receipt, and the cost of mail-ing are eliminated.

2. Better Supplier Relationships

ERS results in more timely communica-tion of data between trading partners andoften generates other economic values forboth partners.

a. More Timely Payments – Because ofthe streamlining of the process the sup-plier receives payment sooner.

b. Maximized Discounts – ERS resultsin fewer problems to resolve, thus al-lowing purchasers to take full advan-tage of prompt payment discounts.

c. Lower Prices from Suppliers – Lesshuman intervention, no paper in-voices, fewer payment problems andno reconciliation issues result in re-duced prices for the supplier as wellas the purchaser. Many purchasers usethis as leverage to negotiate lowerprices with their key suppliers.

Impact on Recordkeeping

The traditional recordkeeping function ofthe purchaser’s accounts payable departmentin receiving the sales invoice, shipping/receiving documents, comparing and verify-ing purchase orders and then determiningpayment has been changed. Responsibilityfor valuation shifts to receiving/inventory orother departments. Pricing is predeterminedbased upon the purchase order/seller’s price

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list. Thus, valuation to inventory/expenseaccounts is determined from “non-tradi-tional” sources.

For the supplier, sales are based uponshipment rather than when sales invoices aregenerated. Exact sales amounts are deter-mined by the purchaser. Taxes due are alsodetermined by the purchaser.

What Tax Issues are Created by theUse of ERS?

A number of issues are raised as busi-nesses become more involved in electroniccommerce. The use of ERS raises similar is-sues as electronic data interchange (EDI) andsome different issues as well.

Issues common to EDI and ERS are:1. Is there a sufficient audit trail to en-

sure proper regulatory compliance?

2. What access to these electronic or com-puter records will be given to the tax-ing authorities?

3. Are there adequate internal controls toensure the integrity of the data?

4. Are hard copies available to supportrefund claims?

Issues unique to ERS are:1. Since there are no invoices generated

by a supplier, what will be acceptedas a valid receipt of sales taxes paid bythe purchaser directly to the supplier?

2. Traditionally, the obligation to calcu-late and remit sales tax is imposed onthe supplier. Since the supplier no longerhas complete control over the tax calcu-

lation function, this becomes morecomplicated. How will the tax authori-ties cope with this changing environ-ment? How will the supplier be able todocument that the correct tax was paid?

3. ERS causes accounting and auditingissues different than conventional sys-tems. Validating internal and inven-tory controls, no sales invoices, and adifferent method of purchasing andpayment provide new challenges fortaxing authorities. How will they dealwith these challenges?

4. There may be discrepancies such asfreight, price, or quantity adjustmentsthat affect the sales tax base. What willbe available and acceptable to validatethese changes from the original pur-chase order (goods order)?

5. Local taxes and home rule taxes maydiffer from state laws. How can thesedifferences be addressed in an ERSsystem? Alabama, Arizona, California,Colorado, Illinois, Louisiana and oth-ers have different local tax rules thatmay apply differently than their statetax rules. This issue needs to be con-sidered when using ERS.

6. Since a sales invoice may not be cre-ated involving an ERS transaction,what will be acceptable proof to sup-port a claim for refund?

7. Many states’ laws require that salesand use tax be separately stated. Inthe absence of an invoice, can this le-gal requirement be met by other docu-mentation? What forms of documen-tation will be available and acceptableto meet this requirement?

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ERS Business Models

The Electronics Industry Data Exchange(EIDX), Telecommunications Industry Forum(TCIF) and Automotive Industry ActionGroup (AIAG) have published ERS businessmodels which identify business processescompanies should consider when implement-ing ERS and make recommendations associ-ated with ERS processes. Refer to AppendixA for publications information.

ERS - Tax Methodologies andProcesses

Processing tax calculations in an ERS en-vironment relies on standard taxation prin-ciples. Transactions between supplier andpurchaser still require sales tax calculationwhen the supplier is registered to collect taxin the destination state. If the supplier is notregistered to collect sales tax, the purchaserstill must report and pay the consumer’s usetax. It is key to understand the standard prin-ciples of taxation in order to then apply themto ERS transactions.

Types of Transactions2 and Definitions

1. Tax Verification-Traditional Invoice:This involves all payables transactions.The purchaser’s system will verify thatthe correct amount of sales tax hasbeen charged on taxable purchases. Ifthe item is taxable and no tax wascharged, the invoice will also be pro-cessed through the use tax accrual pro-cess. If tax was charged incorrectly, aprocedure must be programmed tohandle the exception.

2. Use Tax Accrual-Traditional Invoice:This transaction involves a systems

calculation only on payables invoicesthat do not include sales tax chargedby the supplier (includes sales, seller’suse, vendor’s use, and retailer’s usetax). The purchaser’s system will cal-culate the correct amount ofconsumer’s use tax on the purchase.

3. Evaluated Receipts Settlement (ERS):This transaction is usually an elec-tronic process whereby the purchasersubmits an order to the supplier whoships goods upon acceptance of theorder. The purchaser then processespayment of the amount based on theorder terms. The supplier issues no in-voice. The purchaser must remit salesor use tax with the payment based onthe jurisdictions where the supplier isregistered and would have collectedtax had an invoice been issued. Thepurchaser’s system will calculate thesales tax as if the supplier had issuedan invoice. If no tax is calculated, thepurchase will then be processedthrough the use tax accrual process.

Tax Verification - Traditional Invoice

1. In order to have a tax calculation sys-tem verify the amount of tax charged,the purchaser must input tax chargedas a separate item in the accounts pay-able system. Then the purchaser’s MISdepartment can write a routine to com-pare the tax charged on the invoice tothe tax calculated by the tax calcula-tion system. The tax calculated shouldnot be established as a tax accrual as itis only a comparison amount, not anamount to be paid.

2. Based on the results of the compari-son, a decision tree needs to be deter-

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mined. If tax was charged correctly orwithin a tolerance level, the invoiceshould proceed through the payablessystem for full payment.

3. If the invoice was appropriately ex-empt from tax and tax was not chargedby the vendor, the invoice should pro-ceed through the payables system forfull payment.

4. If tax was charged incorrectly or thetax charged exceeded the thresholdamount, the purchaser will need todevelop an error procedure. Thiscould either be to send the invoice backto the supplier with appropriate ex-emption documentation for exemptitems or a letter explaining the prob-lem and requesting a new invoice. Orthe invoice could be paid eliminatingthe tax charged with appropriate docu-mentation provided to the supplier.

5. Invoices without tax or invoices deter-mined to be taxed incorrectly will thenbe processed through the use tax ac-crual procedure.

6. Taxability matrices can be set up in twoways depending on the accuracy de-sired by the purchaser. For more ac-curate tax determination, the pur-chaser must set up their tax calcula-tion system to mirror the parametersthat the supplier would use to collecttax. This includes identification ofwhere the supplier is registered to col-lect tax and where their "ship from"and "order acceptance" locations are.This will accurately calculate sales taxor use tax and the appropriate localtaxes.

7. To calculate an approximate amountof tax that the supplier is charging,purchaser can use the same taxabilitymatrices as for use tax accrual. How-ever, this will not necessarily calculatethe correct tax type (sales or use) or thecorrect local tax. The vendor may notbe registered in the same jurisdictionsas the buyer. This could be an issuewith drop shipments and home-rulejurisdictions.

Use Tax Accrual - Traditional Invoice

1. For the tax system to automaticallyrecognize invoices without tax, the taxcharged by the supplier must be en-tered as a separate item in the accountspayable system. Then the purchaser’sMIS department can write a routine tosend only invoices that did not includean entry to the tax system.

2. Taxability matrices in tax calculationsystems would be based on thepurchaser’s nexus and taxability ofproducts.

3. "Ship to," "ship from" and "order ac-ceptance" addresses are necessary todetermine tax type due (sales vs. usetax) and local tax rates for intrastatetransactions.

4. Ship from and order acceptance ad-dresses would be supplier’s locations.The purchaser will probably defaultorder acceptance to match ship fromunless other information is known.

5. Taxability tables can be created usingvarious parameters. The determina-tion of what fields to use for taxabilitysetup will depend on the complexity

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or simplicity of the purchaser’s ac-counting system. Some suggestions forfields to use in defining tax exceptionsare: vendor, product code, general led-ger account/sub-account, cost centers,fixed asset project numbers, inventorycodes, or location codes.

ERS - Tax Calculation/Verification

1. In ERS, the purchaser must calculatetax as if the supplier was issuing aninvoice. This will entail significantprogramming and system enhance-ments to transition from a traditionalAccounts Payable environment. Somethird-party sales tax software productsmay be able to accommodate the com-plexities related to determining tax onERS transactions. Others will not.Since the purchaser must calculate taxas if it was the supplier, an ongoingrelationship between the two partiesis necessary to maintain the taxabilityjurisdictions of the supplier for tax cal-culation by the purchaser.

2. Purchaser should not remit tax to thesupplier for jurisdictions where thesupplier is not authorized to collecttaxes. In these situations, the pur-chaser must accrue and pay the use taxon taxable purchases. Many states donot authorize direct pay. Therefore,purchaser should not assume that itcan pay all the taxes directly to the taxauthorities as use tax. Also, the sup-plier may turn to the purchaser forpayment of tax at a later date anddouble taxation may occur.

3. To accurately calculate the sales tax3

that the supplier would charge, thepurchaser must set up taxability ma-

trices simulating the tax authority ofeach supplier. It is important for thetax departments of both supplier andpurchaser to communicate regardingthe jurisdictions where supplier is reg-istered.

4. ERS transactions will be processed firstthrough the taxability matrices simu-lating the supplier’s tax authorities onthe purchaser’s system to calculate thetax “charged” by the supplier. Taxshould not be established as a tax ac-crual since the tax is not being paid bythe purchaser to the state. The pur-chaser will need to set up proceduresto include the tax calculated with thepayment of the ERS transaction.

5. If no tax was calculated through thetaxability matrices either because thesupplier is not registered in the deliv-ery state, or because the ERS transac-tion is exempt, then the ERS transac-tion is processed through the use taxaccrual process. A procedure may bewritten such that if after passingthrough the taxability matrices the ERStransaction is determined to be ex-empt, no pass to the accrual tables isnecessary.

6. Since the order may include the taxamount, the purchaser may wish tohave an interface to the order systemto read the supplier taxability tables tocalculate the tax for inclusion on theorder system.

7. Because tax rates differ in some juris-dictions between sales and use tax,appropriate address informationshould be maintained to determine thecorrect tax type. This information in-

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cludes the ship from, ship to and or-der acceptance locations for both thesupplier and purchaser.

ERS - How Do Taxing AuthoritiesAudit in This Environment?

Since ERS (Auto Pay) is a relatively new“business process,” tax administrators areurged to educate their audit groups in thisarea. Appendix B provides a sample auditquestionnaire that can be modified to meetspecific tax authority and taxpayer situations.

Potential Solutions to ERS Issues

Steps that can be taken to address theERS issues include the following:

1. Whenever possible, master serviceagreements, master contracts, tradingpartner agreements or other similaragreements should be entered into.Items that should be addressed inthese agreements are: taxability ofgoods; discount terms; supplier’s salestax registration numbers; calculationand payment of sales tax; and agree-ment by both parties to cooperate inthe event of a tax audit. An exampleof suggested tax language that couldbe included in such an agreement canbe found in Appendix C.

2. The parties should agree to work to-gether on audit issues, and shouldmake available to each other any andall necessary records or documents asrequested by taxing authorities. Thismay be more important and more fre-quently needed in an invoiceless en-vironment.

3. The parties should work together toensure that the taxes are calculated,sourced, and remitted correctly. Issuessuch as taxability, sourcing for localtaxes, and timing for remittanceshould be thoroughly documentedand agreed upon.

4. Trading partners should archive allpertinent electronic data and retain foraudit purposes in the same manner aspaper records. It is suggested that thefollowing electronic records bearchived and retained pursuant to tax-ing authorities statutes:

a. Electronic Purchase Orders – In-cluding purchase order number,supplier name, description ofgoods, quantity, price, discountterms, taxability of item, freight,tax, and account coding.

b. Electronic Goods Receipt Data(Receiving Report) – Includinggoods receipt reference number (re-ceiving report number), date of re-ceipt, supplier name, quantity re-ceived, description of goods, bill oflading or packing slip number, pur-chase order number, and contractnumber.

c. Electronic Price Lists – Includingall updates, changes, dates, etc. tosupport pricing on the purchaseorder.

d. Tax Calculation Data – Includinghistorical tax rate tables, matrices,and related data.

See Appendix D which identifies ANSIX12 EDI transaction sets currently

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used by some trading partners in con-junction with ERS.

5. States with limited or no direct payauthority should consider broadeningor implementing direct pay authoritystatutes to accommodate taxpayersutilizing ERS and other advanced elec-tronic processes.4 This would shift thetax compliance burden to the partythat possesses the requisite informa-tion. The payment information gen-erated and captured by the purchaseris more precise, therefore, the compli-ance level increases. Implementationof direct pay authority will requiremajor law changes in some taxing ju-risdictions.

6. Maintain documentation of the proce-dures utilized to enter the informationpertaining to the ERS transactions intothe accounting system and be preparedto explain to the taxing authorities.

7. Consider the use of “tax only”summaries or invoices to be sent bysuppliers to purchasers to addressvalid receipt concerns. In the event thesupplier provides “tax only” invoices,the purchaser will need enough detailto trace the taxes back to the applicabletransaction/payment in the pur-chaser’s system to document for auditpurposes and verify for accuracy.

8. Another possibility is for taxing au-thorities to recognize purchase ordersas an “in lieu” invoice, consider ANSIX12 transaction set 856 generated bythe supplier as an “in lieu” invoice, orsome combination of the purchase or-der and transaction set 856 as an “inlieu” invoice.

9. Some purchasers send a monthlytax summary or statement to theirsuppliers. Purchasers that send amonthly statement to a supplier,summarizing by state taxing au-thority sales taxes paid, may be re-lieved of their tax liability in somejurisdictions. Other taxing authori-ties may not accept this premise,and may require additional docu-mentation.

10. In the event the purchaser will becalculating sales and use taxes topay the supplier, the supplier willneed to provide the purchaser withthe appropriate list of taxing juris-dictions, and their respective reg-istration numbers, where supplieris qualified and registered to col-lect sales and use taxes. Withoutsuch information, the purchaserwill need to remit the appropriatetaxes directly to the taxing author-ity. This ensures that the purchaserdoes not make a voluntary pay-ment of taxes to the supplier for ajurisdiction where the supplier isnot able to remit such taxes.

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NOTES1 An order is defined to include any manner in which

a purchaser informs the supplier of its desire to pur-chase goods or services.

2 The term "transaction" refers to the process used to

account for payables invoices and electronic records.3 The term "sales tax" includes sales tax, seller’s use

tax, and consumer use tax.4 The joint FTA/Industry Task Force for Electronic

Business Processes is addressing separately the de-velopment of a model uniform Direct Payment Au-thority statute. Currently, the majority of states thathave a sales tax authorize direct pay in various forms.

APPENDIX AEVALUATED RECEIPTS SETTLEMENT (ERS)

BUSINESS MODELS

Automotive Industry Action Group (AIAG)Implementation Guide for Evaluated Receipts Settlement26200 Lahser Road, Suite 200Southfield, Michigan 48034Phone: 810/358-3570Fax: 810/358-3253Internet: http://www.aiag.org/

Electronic Industry Data Exchange (EIDX)Evaluated Receipts Settlement Business ModelElectronic Industry Association2500 Wilson Blvd.Arlington, VA 22201Phone: 703/907-7539Fax: 703/907-7501Internet: http://www.eia.org/eig/eidx/

Telecommunications Industry Forum (TCIF)Sponsored by Alliance for Telecommunications Industry Solutions (ATIS)Internet: http://www.atis.org/atis/tcif/edi/5tc50hom.htm

Go to “Guidelines,” then “Procurement” — The ERS business model, developed by theProcurement subcommittee, is a working document. This document is available in pdfand rtf formats.

Data Interchange Standards Association (DISA)Various EDI-related Publications1800 Diagonal Road, Suite 200Alexandria, VA 22314Toll Free Phone: 888/363-2334Fax: 703/548-5738Internet: http://www.disa.org

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APPENDIX BEVALUATED RECEIPTS SETTLEMENT - SAMPLE QUESTIONNAIRE

1. Does your company utilize Evaluated Receipts Settlement (ERS) in purchasing and/or sales?___Yes ___ NoIf yes, What areas, divisions, locations, etc. use the process?

2. Do you restrict ERS to specific suppliers and/or purchasers? ___Yes ___ NoIf yes,

• In-state only vendors?• Mix of in-state and out-of-state vendors?• How many vendors do you use ERS with?• Please provide a list of the vendors using ERS

3. Do you restrict the types of goods purchased using ERS?• Only taxable goods, only non-taxable goods, or a mix of taxable and non-taxable items?• Provide a list of the type of goods purchased using ERS

4. How is verification that the correct tax is paid on a purchase to a specific vendor’s locationmade?

5. How are Local and Home Rule taxes addressed?

6. Is ERS addressed in supplier/vendor master service agreements or master contracts?___Yes ___ NoIf yes, items which are covered include:

• Taxability of goods• Discount terms• Supplier's sales tax registration numbers• Customer requirements to calculate and pay sales/use tax to suppliers (if registered)• Agreement to cooperate in the event of an audit• Tax rates for supplier-provided locations• How vendor will handle tax issues• Archiving of information to reconstruct transactions

7. What type of audit trail is available relating to ERS transactions?

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8. How are ERS transactions entered into your Sales, Accounts Payable or General Ledgersystems?

• What information is being captured?• What are the sources of that information?

9. How are miscellaneous items handled in your ERS environment?• Freight• Handling charges• Service charges• Other

10. How are discrepancies handled in your ERS environment?• Quantities ordered and quantities received reconciled and handled for payment pur-

poses• Goods that are received in unacceptable condition• Pricing discrepancies handled between order pricing and receiving pricing• Electronic catalogs exchanged and maintained with revisions

11. How do we get the information necessary to resolve timing differences between pricing,quantities, holdbacks, receiving dates, etc.?

12. What ASC X12 Transaction sets are utilized in your ERS process?

13. What documentation is available to show the flow of the ERS transactions into your ac-counting system?

14. Are system or other audit reports (internal and/or third party) of the ERS system availablefor review?

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Appendix B - Evaluated Receipts Settlement - Sample Questionnaire

APPENDIX CERS MASTER AGREEMENT EXAMPLE TAX CLAUSE

(SALES AND USE TAX )

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Example language for ERS Master AgreementTax Clause.

Purchaser shall be responsible for alltaxes (herein referred to as the “Appli-cable Taxes”) levied upon or imposedas a result of any transaction involv-ing the sale of goods or services to beprovided by Seller in connection withan ERS purchase order transmission,including, but not limited to, sales, use,gross receipts and similar taxes, but notincluding taxes based on or measuredby the net income or net worth ofSeller. Purchaser shall pay to Seller allApplicable Taxes attributable to anytaxable goods and services, and Sellershall remit such amount to the appro-priate taxing authority in accordancewith applicable law. Purchaser shallhold harmless and shall indemnifySeller for any Applicable Taxes as-sessed against Seller by any taxingauthority in respect of sales hereunder,including the amounts of any penal-ties, interest and attorneys’ fees leviedagainst or incurred by Seller in connec-tion therewith. Any legal expensesincurred by Seller to reduce or avoidany of the aforementioned taxes shallbe paid or reimbursed by Purchaser.

In the event that Purchaser seeks toclaim any exemption from ApplicableTaxes in any transaction involving an

ERS purchase order transmission, thePurchaser agrees to promptly furnishto Seller hard tangible copies of any ap-propriate or required exemption cer-tificates or other required documenta-tion deemed necessary or desirable bySeller to properly support any suchclaimed exemption. Failure on the partof Purchaser to promptly provide anysuch exemption certificates or otherdocumentation to Seller upon requestwill give Seller the right to immedi-ately invoice Purchaser for all Appli-cable Taxes due as if the claimed ex-emption did not apply. In any event,Purchaser agrees to indemnify andhold harmless Seller from any taxes,interest, penalties or additional costsincurred by Seller as the result of anyclaimed exemption from ApplicableTaxes.

It is the intent of Purchaser to complywith all applicable state and local salesand use taxes or gross receipts taxesin connection with each transactioncontemplated hereunder. In the eventthat Purchaser is required to remittaxes to the Seller in connection withPurchaser’s purchase of goods or ser-vices pursuant to an ERS purchase or-der transmission, Seller shall promptlyprovide to Purchaser upon its requestadequate written documentation toevidence that Seller is licensed to col-

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Appendix C - ERS Master Agreement Example Tax Clause

lect sales and use taxes or gross re-ceipts taxes in any applicable jurisdic-tion, including, but not limited to, a listof the tax registration numbers ofSeller in any and all jurisdictions inwhich the Seller is registered.

Seller agrees to indemnify and holdharmless Purchaser from and againstany taxes, interest or penalties assessedagainst or imposed upon Purchaser asa result of the negligence, willful mis-conduct, act or omission of Seller in

connection with any applicable salesand use taxes or gross receipts taxes.Should any purchase hereunder con-stitute an isolated or occasional saleand not be subject to sales, use or grossreceipts tax with any of the taxing au-thorities having jurisdiction over suchtransaction, no such tax will be col-lected by Seller from Purchaser. Selleragrees to cooperate with Purchaser indemonstrating that the requirementsfor an isolated or occasional sale or anyother tax exemption have been met.

APPENDIX DEDI TRANSACTION SETS

Description Explanation

810 Generic Invoice Standard electronic invoice sent bysupplier to customer.

820 Remittance Advice (Payment Order) Instructions to the bank/payment(information) notification.

824 Application Advice Computer-generated response toanother ANSI X12 transaction set.Example: Bank validates informa-tion sent on 820 was correct.

850 Purchase Orders Standard electronic purchaser ordersent to supplier.

856 Ship Notice/Manifest Supplier acknowledges the orderplaced by customer.

861 Receiving Advice Used for freight forwarders. Send850 to vendor.

862 Supplier Delivery Schedule (SDS) Similar to 861.

997 Functional Acknowledgment (Non-computer) Non-applicationresponse to all transaction sets.Generated by EDI translators checking for ANSI X12 standards.

16

APPENDIX ESTEERING COMMITTEE AND WORK GROUP MEMBERS

Steering Committee

17

Debra AbbottDirector, State and Local TaxesThe Coca-Cola Company

Stanley ArnoldCommissionerNew Hampshire Dept. of Revenue Admin.

Barbara BartonManager, State Research & PlanningElectronic Data Systems Corporation

Julie BraggManager, Sales and Use TaxInternational Paper Company

Dan BucksExecutive DirectorMultistate Tax Commission

Billy CookExecutive DirectorInstitute for Professionals in Taxation

Harley DuncanExecutive DirectorFederation of Tax Administrators

Larry FuchsExecutive DirectorFlorida Department of Revenue

William McArthurExecutive DirectorCommittee On State Taxation

Chip McClureDirector, State and Local TaxSears, Roebuck and Company

Kenneth MillerCommissionerIndiana Department of Revenue

Val OvesonChairmanUtah State Tax Commission

Jeff RasmussenCounselTax Executives Institute

Sandra RobertsonDirector, State and Local TaxGeorgia-Pacific Corporation

Terry SchroederVice President, Retail DivisionMarvin F. Poer & Co.

Stephen ShiffrinAssistant Director, Taxation DivisionArizona Department of Revenue

Ken ZehnderDirectorIllinois Department of Revenue

Bill ZornesDirector of TaxesWestern Auto Supply Company

APPENDIX E

STEERING COMMITTEE AND WORK GROUP MEMBERS (CONTD)

Electronic Business Processes Work Group

Appendix E - Steering Committee & Work Group Members

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Norman W. AyersNew York State Dept. Taxation & Finance

Glenn BedonieFlorida Department of Revenue

Renee BlockerMultistate Tax Commission

Andy BlumbergsNew York State Dept. Taxation & Finance

David BoederOhio Dept. of Taxation

Lloyd CallawayThe Coca-Cola Company

Arnie ChinichWarner-Lambert Company

Barbara ConnollyIllinois Tool Works, Inc.

Barry ConoverUtah State Tax Commission

Mary Jane EgrPricewaterhouseCoopers LLP

Joe EvansMissouri Department of Revenue

Mike GoralArthur Andersen

Paul GreenfieldConnecticut Dept. of Revenue Services

Judith GriesWyeth-Ayerst Laboratories

Dan HallIllinois Department of Revenue

Beth Ann KendzierskiApria Healthcare, Inc.

Rita A. KlepitchWMX Technologies, Inc.

Mark LoftisNorthern Telecom Inc.

David MaysSouth Carolina Dept. of Revenue

Douglas McCubbinArthur Andersen

Stephen MyersLouisiana Dept. of Revenue & Taxation

Edwin P. NacciGeneral Motors Corporation

Appendix E - Steering Committee & Work Group Members

19

Stephen P. OlivierChevron Corporation

John OlsenArizona Dept. of Revenue

Elizabeth PitmanArthur Andersen

Stephanie RosenbuschFederation of Tax Administrators

Robert ShickoraNew Jersey Division of Taxation

Barbara A. TimekAT&T

Steve VeilleuxConnecticut Dept. of Revenue Services

Cathy WicksMinnesota Dept. of Revenue

Diane YetterYetter Consulting Services, Inc.

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