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IPT 2013 Sales & Use Tax Symposium – Monterey, CA
Automating Use Tax
Accruals Without
Interfering With
Accounts Payable
2
Presenters
Richard Hofrichter, CPA, CMI, Partner – Indirect Tax – Grant Thornton LLP
– Office (704) 632-6810
– 201 South College Street, Suite 2500 Charlotte, NC
Jason Abney, Tax Technology Manager – AutoZone, Inc.
– Office (901) 212-2368
– 123 South Front Street, Memphis, TN
3
Learning objectives
Determine when it is appropriate to automate
the use tax accrual function
Understand the options for automation and
which ones are best suited for your needs
Identify the use, benefits, and architecture of
a batch-based use tax accrual system
Agenda
The decision to automate
Different approaches to automation
Batch solution overview, options, and details
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AutoZone’s Decision to Automate
Multiple Enterprise System Changes
– ERP Module Implementation/Upgrade
– New Point of Sale Deployment
– Consolidation of Ecommerce Sites
– Integration to SaaS Sold by AutoZone
5
AutoZone’s Decision to Automate (Cont.)
• Need for Centralized Tax Determination
– Unqualified Individuals Making Tax Decisions
– Labor-intensive Tax Matrix
– Sales & Use Tax Rate Maintenance
– Manual Accruals
– Multiple Tax Rate Service Providers
6
Risks Associated with Manual Review
Error identification and corrective measures limited or not possible
100% detailed review not possible
Decentralized taxability decisions unreliable
Overstated taxes result in negative cash flow
Understated taxes result in audit assessments, interest and penalties
Manual system perpetuates inconsistent treatment
7
Questions?
8
Agenda
The decision to automate
Different approaches to automation
Batch solution overview, options, and details
9
The Approaches to Use Tax Accruals
Manual Methods
– Tax personnel review fixed asset or key AP invoices
– AP clerks are trained to accrue use tax when applicable
Semi-Automated Methods
– Tax rates loaded by ship-to location and calculations are made by the AP system, but triggered manually
– Formula based use tax accruals
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The Approaches to Use Tax Accruals continued
Automated Methods
– Real-time integration of a tax system
– Batch method using a tax system or process
– ERP calculation using loaded rates and rules
Alternate Method
– Let the auditor find it approach
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Considerations
How are use tax accruals currently handled?
Are vendor-charged sales taxes entered?
Are Purchase Orders frequently used?
What has your audit history been? – Regular audit cycle?
– Overpayments found?
How are A/P clerks evaluated? – Will they be given extra time for tax issues?
– Would short-pays and adjustments create a major administrative burden on A/P?
12
Considerations continued Where is the best data available to make a tax
decision? – Purchase Order
– Invoice Payment (Voucher Entry)
– Subsequent Distribution
Do you need to include sales/use tax on Purchase Orders for variance pricing?
Do you want to review transactions before an accrual is made?
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Real-Time Use Tax Automation
Tax system is integrated throughout the ERP
Use Tax is calculated within the ERP system as part of the transaction – Purchase Order
– Goods Receipt
– Accounts Payable (voucher entry)
– Inventory Movement (some ERP’s)
Tax calculations are made in real time
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Real-Time Use Tax Automation Architecture
Purchase
Order
Entry
Purchase
Goods
Receipt
Accounts
Payable
Voucher
Compliance
Program (i.e.
Q-Returns)
Tax Management System
Tax
Reporting
Utility
Transaction
Reporting
Utility
ERP
System
Tax Calculation Package (i.e. Sabrix, Vertex, etc.)
General
Ledger
System
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Batch Use Tax Automation
Data is pushed or pulled from the ERP system and processed in a Use Tax system
Use Tax system is independent of the ERP
Use Tax is calculated off-line using data from the ERP – Accounts Payable (voucher entry)
– Can process Purchase Order data
– Can process Inventory Transfer data
Tax calculations are made after the fact
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Batch Use Tax Automation Architecture
Purchase
Order
Entry
Purchase
Goods
Receipt
Accounts
Payable
Voucher
Compliance
Program (i.e.
Q-Returns)
Tax Management System
Tax
Reporting
Utility
Transaction
Reporting
Utility
ERP
System
Tax Calculation Package (i.e. Sabrix, Vertex, etc.)
General
Ledger
System
17
Questions?
18
Agenda
The decision to automate
Different approaches to automation
Batch solution overview, options, and
details
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Batch Approach Options
Use a third party hosting provider to reduce infrastructure needs
Use a service bureau to reduce staffing needs
– TM1 by DTS
Use a Tax Management System (TMS) loaded locally or hosted
– Can utilize your current third party tax system (Sabrix, Vertex)
– Can utilize internal tax rates and decisions
– Can be hosted to reduce infrastructure needs
Consider your needs when evaluating options
– Load historical data to look for refunds
– Process current data for current use tax accruals
– Look for opportunities to address vendor issues
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Benefits of the Batch Approach
Does not interrupt the A/P process for tax discrepancies
– A/P clerks do not get involved in short-pay decisions
– Reduced administrative effort by A/P in dealing with vendor payment adjustments resulting from sales tax issues
Reduced data entry requirements possible
– Entry of actual tax charged is not necessary, but helpful
Sales taxes charged by vendors can be easily reviewed
– Actual sales taxes charged are stored with accrual information
– Taxed nontaxable purchases can be easily identified
Transaction data can be pre-validated before calculation
– New companies can be identified and established in the tax system
– New taxability driver values, such as chart of account changes, can be identified and their taxability determined before a tax calculation is made
21
Benefits of the Batch Approach continued
Taxability decisions can be reviewed at the transaction level by a tax professional before a tax accrual is made
– Questionable transactions, such as those with mixed-use G/L accounts, can be reviewed manually before processing
– High-dollar transactions can be manually reviewed to ensure correct decisions are made by the taxing system
Some isolation from ERP system upgrades/changes
Additional calculation ability for unusual events
– Allocation of a single transaction to multiple jurisdictions
– Can handle temporary storage/second situs issues
Allows for other external feeds to be processed as well
– The TPS can be built to allow for generic file formats from any transaction source, including Excel files
– Can also allow for manual entry of transactions
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Limitations of the Batch Approach
Does not prompt A/P clerks to short-pay taxes to vendors
– This is a mixed blessing, but results in potential overpayments to vendors until identified and fixed
– Reports from the TPS can be used to identify vendors erroneously charging taxes or the wrong tax rates
– Reports for the TPS can also be quickly used to pursue vendor and tax authority refunds
– Taxes have already been paid to the vendors before the overpayment is identified
Does not include tax to be added to Purchase Orders
– Can not be used to guide vendors if they should charge tax
– Does not allow for adding the tax amount to the PO ‘budget’
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Limitations of the Batch Approach continued
Can not include tax for unit pricing and budgeting issues
– For a PO, the taxes either charged or accrued become a variance
– If taxes should be added to inventory for withdrawal, this is done at the G/L level rather than the item level
Use taxes accrued on fixed assets are not included in the original basis of the transaction
– The tax amount would be sent as a journal entry from the TPS
– The original asset could be adjusted, or a new child record created
Tax accrual information is not included directly in the transaction
– The tax accruals are posted to the G/L through journal entries
– The JE description or other information will link the entry to the original A/P transaction from where the expense resulted
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Batch Versus Traditional Real-Time Integration
Requirement
Real-
Time
Batch
Prompting A/P clerks to short-pay tax charged by
vendors Yes No
Evaluating sales taxes charged by vendors for
refund opportunities No* Yes
Including expected taxes on Purchase Orders Yes Yes*
Reviewing taxability decisions before tax accruals
are made automatically No Yes
Include sales or use tax amounts in variance
pricing for Purchase Orders and Inventory Yes No*
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TMS Overview and Uses
Determining use tax accruals on P2P transactions, typically
at the accounts payable level, which is performed through
extraction of transactions from the ERP system and
processing them using a standalone Tax Processing System
that communicates with the tax product being used by the
organization.
Monthly tax accrual determinations
Reverse audits
Vendor tax analysis
Sales tax batch processing
VDA/Mitigation
26
TMS Overview and Uses
Data is pushed or pulled from one or more ERP systems and processed in a Tax Management System (TMS)
The TMS is developed based on the organization’s needs, and is independent of the ERP system
Use Tax is calculated off-line using data from the ERP
– Accounts Payable (voucher entry)
– Can process Purchase Order data
– Can process Inventory Transfer data
– Easily supports other data sources
Tax calculations are made after the fact
Typically, a third party tax system is beneficial but TMS can be standalone
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Data Extraction and Process Flow
Transaction
Reporting
Utility
Purchase
Order
Entry
Purchase
Goods
Receipt
Accounts
Payable
Voucher
Compliance
Program (i.e.
OneSource)
Tax Management System
Tax
Reporting
Utility
ERP
System
Tax Calculation Package (i.e. Sabrix, Vertex, etc.)
General
Ledger
System
28
TMS and User Interface Examples
Multi-National Manufacturing and Services Company
– Using SAP MM and A/P Integrated with Vertex O-Series (Real-Time)
– Have several other SAP instances not integrated
– Also have several legacy systems for purchasing/accounts payable not integrated
Implemented O-Series for Use Tax
– TPS allows all external systems to feed into the same O-Series instance as serving SAP real-time
– Allows for additional data feeds to be defined in the future
– All data resides in one place for audit and compliance needs
TPS was built in .NET using an MS SQL Server database
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TMS Home Page
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TMS Data File Upload
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TMS Workflow Management
TMS Transaction Review
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TMS Tax Decision Review
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TMS Filtering Transactions
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TMS Changing Taxability
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TMS Vendor Tax Review
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TMS Data File Setup
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TMS Data Transformation Rules
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Home | Back | My Account | Feedback | Vertex | Logout
TMS Mapping Table Example – City Overrides
Home | Back | My Account | Feedback | Vertex | Logout
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TMS Journal Entry Output
Home | Back | My Account | Feedback | Vertex | Logout
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TMS Mapping Table Example – City Overrides
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Home | Back | My Account | Feedback | Vertex | Logout
TMS Project Example Conclusion
Pros
– Allowed seamless integration of multiple external data feeds
with their existing Vertex O-Series product
– Added the ability to process SALES transactions in a batch
mode for additional data sources
– Allowed for pre-validation and review of select transactions
– Handled data issues through transformation rules
– A/P clerks were not interrupted by any tax questions
Cons
– Transaction tax data was not directly attached to the
transactions
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Example: Use Tax Automation
Leading provider of cable TV, internet, entertainment, information, and communication services
Run Oracle/OneSource Determination for Fixed Asset Procurement
No formal tax evaluation and accrual process for: – Expenses
– Inventory Transfers
– Procurement Cards
Required a single file format for journal entry uploads and summarized compliance output
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GT Client Server Batch Solution
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Expense Use Tax Automation
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Expense Use Tax Automation
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Expense Use Tax Automation
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Inventory Transfer Use Tax Automation
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Inventory Transfer Use Tax Automation
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Inventory Transfer Use Tax Automation
P-Card Use Tax Automation
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P-Card Use Tax Automation
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P-Card Use Tax Automation
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Questions?
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