"No corporation wants to pay egregiously high fines or risk a government audit for violating sales tax laws. Outsourcing has become a good way to make sure someone knowledgeable is keeping up with the confusing welter of laws for companies doing business in more than one locale. Service providers also have the technology to calculate and monitor the tax faster and more accurately. "Day-to-day tax management is a non-strategic activity that diverts staff focus," says Patrick Grogan, Director of Marketing for Sabrix, which is part of Thomson Reuters Tax and Accounting." Read the full article in the August 2010 Issue of Outsourcingcenter
Learn how the latest release of the Sabrix Integration for Oracle 12 enables companies to quickly deploy a fully automated tax solution with SAS 70 certified tax research. Register now for the July 28th web seminar to learn more.
During this event, you will learn:
• How the Sabrix Application Suite supports Oracle customers with global transaction tax compliance
• How the Sabrix Integration for Oracle 12 facilitates and streamlines support for multi-country deployments by setting up one regime to rate flow per country.
• How Sabrix extends Oracle EBTax functionality with out of the box tax determination and calculation, tax rate logic and up to date SAS 70 certified tax research.
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I love my job because I get to work with different companies. My job is to help them build a sound sales and use tax foundation. I often hear many of these companies are surprised to learn how complex this foundation can be. That's because the process sounds simple: take an item cost and apply a sales tax rate to it. Then you calculate the sales tax and add it to the invoice. Boom - you're done, right? I wish it was so, but NO!
Let's use an analogy of building a house. In many ways building a solid sales tax and use tax foundation is as complex as building a house. While a house is a simple concept, there are millions of pieces in it. These pieces range from big things such as roof beams, to siding, to flooring, to little things like nails, screws, shims, etc. This is the same as building a solid sales and use tax foundation. It starts with big pieces like accounting systems, business processes, item descriptions, cost, to little pieces, like ship to addresses, ship from addresses, customer exemption, invoice structure, contract relationships, etc. Wow, I could go on forever.
In order to build a solid sales tax and/or use tax foundation, you have to focus on all of the pieces. You can't leave anything out. If you do, your tax foundation could crumble. It would be like a house built without nails; it, too, will crumble. That's why I spend a lot of time understanding your sales tax and use tax needs. I also focus on the business structure and internal processes. I ask a lot of questions, so that we can build a solid foundation that will hold up no matter what the weather may be!
San Ramon, CA, May 12, 2010 – The Tax & Accounting business of Thomson Reuters announced today availability of the latest version of the Sabrix Application Suite, the company’s on-premise, global transaction tax solution that seamlessly connects to all financial applications required for the determination, calculation, and recording of transaction taxes. Read full press release HERE.
The New York State Department of Taxation and Finance released publication 774, Purchaser's Obligations to Pay Sales and Use Taxes Directly to the Tax Department. The publication answers commonly asked questions from individuals, estates, and trusts regarding use tax.
The punchline is that you owe New York state and local sales and use tax if you purchase tangible personal property that is delivered within New York State without payment of the New York State sales tax to the seller. New York use tax may also be owed by New York State residents that purchase property or services performed on property outside of New York State and bring the property into New York State for use.
For individuals not registered for sales and use tax purposes, use taxes due should be remitted on the New York State personal income tax return. Two methods are offered for calculating the amount of tax due - the exact calculation method or by using the sales and use tax chart (for items and services costing $1,000 or less). For example, a New York resident with 2009 Federal AGI Tax Amount between $75,000 to $100,000 would remit $44 of use tax. Additional brackets and more information can be found in the New York Use Tax Publication .
The punchline is that you owe New York state and local sales and use tax if you purchase tangible personal property that is delivered within New York State without payment of the New York State sales tax to the seller. New York use tax may also be owed by New York State residents that purchase property or services performed on property outside of New York State and bring the property into New York State for use.
For individuals not registered for sales and use tax purposes, use taxes due should be remitted on the New York State personal income tax return. Two methods are offered for calculating the amount of tax due - the exact calculation method or by using the sales and use tax chart (for items and services costing $1,000 or less). For example, a New York resident with 2009 Federal AGI Tax Amount between $75,000 to $100,000 would remit $44 of use tax. Additional brackets and more information can be found in the New York Use Tax Publication .
Ontario's plan to adopt the HST this year is facing strong opposition in Parliment and from consumer groups. The HST would combine Ontario's sales tax with the federal goods and services tax, and would raise the price of many items not previously affected by provincial sales tax, such as fast food, haircuts and travel.One consumer lobby group,The National Citizen's Coalition, has a calculator on its website (nationalcitizens.ca) to help consumers determine how much extra the new tax will cost. According to the president of this group members have said they will be spending anywhere from $800 to $3,200 more a year if the HST passes.
On the other hand a recent report by the School of Public Policy at the University of Calgary said the HST, along with other tax cuts in the 2009 provincial budget, would create $47 billion in new investment in Ontario and 591,000 jobs over 10 years.
A bill paving the way for the HST, which Ontario would like to see in place by July 1, 2010, is expected to be presented to Parliament by March 31.
More information is available on the Ottawa Citizen website.
Sabrix Sales and Use Tax Series: Achieving Sales & Use Tax Compliance in Your E-Commerce Business
Join me Thursday, July 23rd at 10AM PDT for this 45 minute presentation as I discuss some of the common sales and use tax compliance challenges found in E-Commerce Business and how Sabrix addresses them. This event will include:
• A discussion on the recent New York nexus law impacting retailers
• The importance of accurate determination and calculation at the shopping cart level
• How Sabrix tax experts enable you to stay focused on your business and achieve compliance
• A Profile of Sabrix e-commerce customers and their return on investment
SAP recently released a memorandum (SAP Note 1298748) on the EU package for value-added tax or VAT tax, 2010. In this Note, SAP warns their customers that they are currently working to implement the new requirements, but that due to missing implementing provisions of the various EU member states that they are not ready yet.
Due to the distinction between B2B and B2C type of transactions, SAP is working to provide control options in Customizing for tax codes for the processing of taxes on sales/purchases for services. In their Note, SAP explains this as follows.
Business to Business (B2B)
For supplies of services to a taxable recipient of a service, the general rule with respect to the place of supply of services should be based on the place where the recipient of a service has established his business. Furthermore, the tax liability is shifted to the recipient of the service. To enable uniform posting for documents of the new directive, new tax codes for the relevant country of the service provider and service recipient have to be configured.
The service provider has to create a new output tax code with 0 %. For the service recipient, a new "Reversed Charge" tax code with the tax rate for services that is valid in the relevant country has to be defined. The indicators are to be created in Customizing ("Financial Accounting Global Settings -> Tax on Sales/Purchases -> Calculation -> Define Tax Codes for Sales and Purchases").
Example of the procedure for suppliers of a service: Define an output tax code in the relevant tax procedure; Tax type A - Output tax, EU code 4 (Output Tax for Services VAT 2010), Tax Type Output Tax (MWS) 0%.
Example of the procedure for the service recipient: Define an input tax code in the relevant tax procedure; Tax type V - Inputtax, EU code 5 (Input Tax for Services VAT 2010), Tax Type Input Tax (VST) 19 % (for example, for Germany) and Output Tax (MSW) - 19 % (for example, for Germany).
Be aware that if the total input tax is no non-deductible, you have to review another Note (98181) for a configuration example for the relevant tax types. The EU codes 4 and 5, which are required in the future, are currently not available in the system. SAP will deliver the tax codes as soon as they are available.
Business to Customer (B2C)
For supplies of services to non-taxable persons (usually consumers), the general rule with respect to the place of supply of services should be based on the place where the supplier of services has established his business. In this case, the tax liability remains with the supplier of the services.
Since the country-specific implementation provisions are missing, it is currently not certain if and in which EU member states business transactions of this type have to be reported in the EC sales list. If this is required in some countries, a new output tax code with a country-specific tax percentage rate for services has to be configured for the sovereign of incorporation of the supplier of services.
Example for procedure: Define an output tax code in the relevant tax procedure; Tax type A - Output tax, EU code 4 (Output Tax for Services VAT 2010), Tax Type Output Tax (MWS) 19 %.
This is all the SAP user community has received from SAP to prepare their Transaction Tax systems for 2010.
Due to the distinction between B2B and B2C type of transactions, SAP is working to provide control options in Customizing for tax codes for the processing of taxes on sales/purchases for services. In their Note, SAP explains this as follows.
Business to Business (B2B)
For supplies of services to a taxable recipient of a service, the general rule with respect to the place of supply of services should be based on the place where the recipient of a service has established his business. Furthermore, the tax liability is shifted to the recipient of the service. To enable uniform posting for documents of the new directive, new tax codes for the relevant country of the service provider and service recipient have to be configured.
The service provider has to create a new output tax code with 0 %. For the service recipient, a new "Reversed Charge" tax code with the tax rate for services that is valid in the relevant country has to be defined. The indicators are to be created in Customizing ("Financial Accounting Global Settings -> Tax on Sales/Purchases -> Calculation -> Define Tax Codes for Sales and Purchases").
Example of the procedure for suppliers of a service: Define an output tax code in the relevant tax procedure; Tax type A - Output tax, EU code 4 (Output Tax for Services VAT 2010), Tax Type Output Tax (MWS) 0%.
Example of the procedure for the service recipient: Define an input tax code in the relevant tax procedure; Tax type V - Inputtax, EU code 5 (Input Tax for Services VAT 2010), Tax Type Input Tax (VST) 19 % (for example, for Germany) and Output Tax (MSW) - 19 % (for example, for Germany).
Be aware that if the total input tax is no non-deductible, you have to review another Note (98181) for a configuration example for the relevant tax types. The EU codes 4 and 5, which are required in the future, are currently not available in the system. SAP will deliver the tax codes as soon as they are available.
Business to Customer (B2C)
For supplies of services to non-taxable persons (usually consumers), the general rule with respect to the place of supply of services should be based on the place where the supplier of services has established his business. In this case, the tax liability remains with the supplier of the services.
Since the country-specific implementation provisions are missing, it is currently not certain if and in which EU member states business transactions of this type have to be reported in the EC sales list. If this is required in some countries, a new output tax code with a country-specific tax percentage rate for services has to be configured for the sovereign of incorporation of the supplier of services.
Example for procedure: Define an output tax code in the relevant tax procedure; Tax type A - Output tax, EU code 4 (Output Tax for Services VAT 2010), Tax Type Output Tax (MWS) 19 %.
This is all the SAP user community has received from SAP to prepare their Transaction Tax systems for 2010.
Written by guest writer: Prashanth Ponnachath, Technical Alliance Manager with Sabrix
One of the key factors in determining accurate sales tax is to identify the taxing jurisdiction. The United states has more than 13,000 taxing jurisdictions. When sales tax for a product needs to be applied, the taxing jurisdictions need to be identified. Once the jurisdictions are identified, the rates need to be identified. The zip code is a common mechanism used to identify this. . The ZIP code is the system of postal codes used by the United States Postal Service (USPS). The letters ZIP, an acronym for Zone Improvement Plan, are properly written in capital letters and were chosen to suggest that the mail travels more efficiently, and therefore more quickly, when senders use the code. The basic format consists of five numerical digits. However, using just the zip code exposes the vendor to audit since the zip is unable to identify and pin point the taxing jurisdictions because many taxing jurisdictions may exist within a zip code thereby causing incorrect taxes to be calculated.
Another method used to find out the taxing jurisdictions is a process called geocoding. Geocoding is the process of finding associated geographic coordinates (often expressed as latitude and longitude) from other geographic data, such as street addresses, or zip codes (postal codes). The use of geocodes does not address the issue of accurately identifying the taxing jurisdiction since multiple jurisdictions can exist within a geocode just like zip codes.
The most accurate method to pin point a location is the zip+4 . An extended zip+4 code includes the five digits of the ZIP code, a hyphen, and four more digits that determine a more precise location than the ZIP code alone. The zip+4 clearly identifies and pin points the taxing authority. Sabrix MTS uses the zip+4 instead of zipcodes and geocodes. One of the key challenges of using the zip+4 is the fact that most vendors do not have zip+4 value in the billing and shipping addresses of customers. This challenge can be overcome by using the address validation feature provided by Sabrix MTS. When Sabrix MTS receives an address with the street name, city and state, the address validation feature has the ability to automatically add the zip+4 to the address thereby making sure that the taxing authorities are correctly identified. This ensures that the address leg of the stool is always accurate and spot on.
When we work with prospective clients, we break sales & use tax down to its basic elements. This helps us understand the needs of the prospect and their specific sales & use tax requirements.
In doing this, we like to use the 3 legged stool analogy. Just as a stool needs at least 3 legs to stand, sales & use tax needs at least 3 data elements to be calculated. The 3 data elements are the answers to the following questions:
1. What are you selling?
2. Who are you selling it to?
3. Where is it being consumed?
Now, there are a lot of complexities that we can layer on these questions, but those can only come after we have these answers. If you can answer these questions and you have a means for capturing the answers in your system or business process, then you are well on your way to building your basic sales & use tax process. In my future blogs, we will discuss each of these legs so that we can build our sales & use tax stool together.
You hear this phrase all the time now but what does it really mean? With rapidly changing technology, people and companies are all about automating their various functions and that's a good thing as long as you know what you are automating and how to automate it correctly and efficiently.
Here at Sabrix, we work with companies of all sizes and in all industries to help them automate their sales tax process. It is interesting when we talk to them because everyone has different ideas regarding what sales tax automation really is. Some people think it is simply providing sales tax rates for them to bolt into their ERPs. Others think it is the automation of the sales tax calculation process.
Both of these answers are technically correct, however, they fall short in the 21st century definition of sales tax automation. In the new millennium, tax automation goes beyond just tax rates or tax calculation, it adds another layer - service. Service takes the concept of tax automation to the next level and really makes it complete. Service is the human component of automation. Sounds counter intuitive, but it's true that all tax automation is driven by the human expertise.
As a potential user of tax automation, you need to ensure that the tax expertise of the automated functionality is of the highest quality. When seeking out a sales tax solution, you should be just as focused on the tax expertise of the people managing the content of the automation as well as the service. You should ask questions regarding their level of experience with sales tax, their educational backgrounds, as well as their roles and responsibilities within the company. The answers to these questions will go a long way in assisting you in determining which tax automation is the right one for your company.
Update
I received a comment to this blog posting asking "As a consumer, what else can I do besides file a class-action lawsuit against a company who is overcharging sales tax?"
Having been charged the incorrect sales tax rate multiple times (both over and under), I will let you know what I have done. The first thing I do upon noticing an error is go to the Department of Revenue website and make sure that I am right. Tax authority boundaries can change with little fanfare so I always do a quick check before I accuse them of being wrong. If there is a legitimate error, then I ask to speak with the manager/owner of the business. The benefit of the recent research is that I usually try to bring a DOR publication if I am meeting them in person or I can point them to the website if I am speaking to them over the phone. If they seem unresponsive or continue with the error on my next visit, then I reach out one more time to the next highest authority level at the business. If it doesn't work, then I reach out to my local Department of Revenue office/representative notifying them of the error. My situation is unique in that I can just tell my husband (a Washington Tax Auditor), but after that, I am like everyone else and have to assume that the DOR is handling it appropriately and properly "educating" the taxpayer. If the error continued, I would probably stop frequenting the establishment rather than pursuing legal means, but that is just my nature.
Original Post
If you don't know the correct sales tax rate, is it better to over-charge sales tax or under-charge sales tax? I get this question on a regular basis.
If you under-charge sales tax, the tax authorities will come after the taxpayer for the difference. It is certainly possible for the taxpayer to go back to the consumer for the tax difference, but it is unlikely, and the taxpayer will need to pay the difference. The excess tax due comes out of the profits of the business.
If you over-charge sales tax the tax authorities get more than the amount due, the taxpayer doesn't owe an additional amount, but the consumer loses. Most folks think this sounds like the better option initially, since the business doesn't take the risk of owing additional taxes. The problem though is that consumers do not like being over-charged sales tax and it can lead to class-action lawsuits for over-charged tax. There have been many class-action lawsuits around sales tax. Dr. Will Yancy, CPA provides reviews of selected class-action lawsuits on his website which can be found here.
So you don't want to over-charge sales tax and you don't want to under-charge sales tax. You need to address your tax calculation and automation needs to make sure that you stay good with tax authorities and your customers.
I received a comment to this blog posting asking "As a consumer, what else can I do besides file a class-action lawsuit against a company who is overcharging sales tax?"
Having been charged the incorrect sales tax rate multiple times (both over and under), I will let you know what I have done. The first thing I do upon noticing an error is go to the Department of Revenue website and make sure that I am right. Tax authority boundaries can change with little fanfare so I always do a quick check before I accuse them of being wrong. If there is a legitimate error, then I ask to speak with the manager/owner of the business. The benefit of the recent research is that I usually try to bring a DOR publication if I am meeting them in person or I can point them to the website if I am speaking to them over the phone. If they seem unresponsive or continue with the error on my next visit, then I reach out one more time to the next highest authority level at the business. If it doesn't work, then I reach out to my local Department of Revenue office/representative notifying them of the error. My situation is unique in that I can just tell my husband (a Washington Tax Auditor), but after that, I am like everyone else and have to assume that the DOR is handling it appropriately and properly "educating" the taxpayer. If the error continued, I would probably stop frequenting the establishment rather than pursuing legal means, but that is just my nature.
Original Post
If you don't know the correct sales tax rate, is it better to over-charge sales tax or under-charge sales tax? I get this question on a regular basis.
If you under-charge sales tax, the tax authorities will come after the taxpayer for the difference. It is certainly possible for the taxpayer to go back to the consumer for the tax difference, but it is unlikely, and the taxpayer will need to pay the difference. The excess tax due comes out of the profits of the business.
If you over-charge sales tax the tax authorities get more than the amount due, the taxpayer doesn't owe an additional amount, but the consumer loses. Most folks think this sounds like the better option initially, since the business doesn't take the risk of owing additional taxes. The problem though is that consumers do not like being over-charged sales tax and it can lead to class-action lawsuits for over-charged tax. There have been many class-action lawsuits around sales tax. Dr. Will Yancy, CPA provides reviews of selected class-action lawsuits on his website which can be found here.
So you don't want to over-charge sales tax and you don't want to under-charge sales tax. You need to address your tax calculation and automation needs to make sure that you stay good with tax authorities and your customers.
On 13 May 2009 West Virginia Governor Joe Manchin signed Executive Order No. 10-09 into law, enacting a suspension of consumer sales and use tax on specific purchases of construction materials being used for flood relief in Boone, Logan, McDowell, Mingo, Raleigh, and Wyoming Counties. The sales tax exemption became effective immediately (13 May 2009) and will continue until 10 June 2009. The sales tax exemption only applies to building materials and supplies used to repair, restore, reconstruct, or replace structures damaged by flooding. It does not apply to the replacement or repair of property that is not classified as a permanent fixture to the structure, non-essential or luxury items, or typical household appliances. In order to qualify for sales and use tax exemptions, the taxpayer must complete a Flood Exemption Certificate.
I am very pleased to say that Sabrix first became aware of this on Friday, May 15th and was able to release an update to provide the correct sales tax calculation for flood victims and business selling eligible items on Saturday, May 16th at 9 a.m. PDT. Trust me, I was not looking forward to bringing the bad news that we needed an additional update when it was Friday morning and the weekend forecast looked great. However, in retrospect I had nothing to fear and I am so proud to work for a company that has such a commitment to our work product and ensuring sales and use tax compliance.
For more information on the WV Exemption see here.
If you are in the middle of preparing your Washington Excise Tax Return for April, which is due May 25th, don't forget that sales within the Regional Transit Authority (RTA) of King, Pierce, and Snohomish Counties have an increased sales and use tax rate. Effective April 1st, the sales and use tax rate for Seattle increased to 9.5%. If you missed the rate change, it was a substantial increase and impacted the areas within the RTA, which has special boundaries that don't necessarily follow city or county lines. If your sales tax calculation was incorrect at the time of invoicing, you will want to make sure that you get the correct amount of tax reported on your tax return.
Selected tax rates within the Seattle area are as follows:
Selected tax rates within the Seattle area are as follows:
- Unincorporated King County - 9.5%
- Unincorporated King County outside the RTA - 8.6%
- Bellevue within the RTA - 9.5%
- Kirkland - 9.5%
- Redmond within the RTA - 9.5%
- Seattle - 9.5%
As you probably know, California’s sales tax increase just took effect April 1st. That means that all invoices and purchases made after midnight on April 1st had to have the new rate applied to them. If your company missed the rate increase by a week, a day, or even a few hours, you have a problem. If your company is responsible for billing and collecting California sales tax, then you are legally required to ensure the new rates are used the date they are enacted. If you miss updating your rates, even by a few minutes, you will be responsible for making up the difference. There is no grace period. That means you need to be sure that you have updated your sales rates in your billing or ERP system, so that they are live the minute the time changes. This may seem like a simple task, but when you start adding in all of the county, city, district, and special jurisdiction rates they can really add up. Right now, there are over 13,253 sales tax jurisdictions in the U.S. alone. That’s a lot to manage. Not only do you have to update the rates, but they need to be tested to ensure that the taxation calculations work correctly. Once you have done that, you need to be sure that the reports capture the data so that you can prepare the returns accurately.
In this blog we'll discuss the components of managing sales & use tax compliance. We'll uncover the internal component related to managing sales & use tax compliance – IT or technology costs. Identifying the costs of IT or technology support is a multi-step process. First, you need to look at the staff components. Second, you need to look at the hardware and software components. Third, you need to translate them into costs.
Let’s start with step one, staff. Quantifying the IT staff costs associated with managing sales & use tax is a similar process to what we walked through regarding the accounting staff costs. You need to start by compiling their time spent on managing sales & use tax software. This would include installing updates, fixing system glitches, building custom coding, and other work done to support the software and the end users. Next, you need to add any time that is spent managing or fixing the hardware needed to support the sales & use tax function. Once you have your time you would follow the same procedure outlined in my previous blog to calculate the total cost.
The next piece of the IT costs is the actual cost of the software and hardware needed to support the sales & use tax process. These costs may be direct from a third party vendor, they may be bundled with other costs, or they may be part of internal costs. Included in this piece would be cost for server space, cost for data storage, cost of backup systems, as well as software costs. These costs are important to capture because they are part of the overall total cost of sales & use tax compliance.
Once you have identified your staff costs and your technology costs, you can add them together to arrive at your total technology component of your total cost of sales & use tax compliance.
In many countries where a Transaction Tax, or VAT tax, is applicable the calculated tax amounts needs to be rounded. For example, in Belgium if the amount of VAT owed is a fraction of a euro with more than two decimal places (i.e. a fraction of a eurocent), this fraction must be rounded up or down to the nearest cent depending on whether the third decimal place is five or more, or less than five. It is the total VAT amount on each invoice that is to be rounded off, regardless if it is a deposit invoice, interim invoice or final invoice.
If the taxable basis is 47.23 EUR, resulting in a VAT amount of 9.9183 EUR (21%), the amount of VAT owed will therefore be expressed to two decimal places obtained by application of the rounding off rules, i.e. 9.92 EUR.
To accommodate countries that require VAT amount rounding, the Sabrix Solution (v5.1) offers this option for businesses that require the accurate calculation of taxes at the document level. When document rounding is applied, the sum of the taxes at the line level would be the same as the taxes calculated on the entire document.
By focusing efforts on the transaction tax management, corporates are finding an opportunity to increase cash flow.
In the context of current economic conditions, government bodies across the globe are doing everything they can to preserve revenue and stimulate the economy. Internationally and in the US, state and local governments reacted by instituting over 1170 tax rate and tax authority changes in 2008.
Meanwhile, consumer confidence is low, revenue is short and businesses must find ways to cut operating costs whether by reducing travel, non-critical expenses or closing offices. The US Department of Labor statistics reported 2.6 million jobs lost in 2008 - more than in any year since World War II.
So while governments work to balance the budget by changing transaction tax laws, this will have a direct affect on businesses which, despite their efforts to cut costs, will be burdened with additional tax compliance requirements.
Historically viewed as non-strategic, businesses have not dedicated as much time and energy to addressing transaction tax management as other financial issues. But with current market conditions in which a myriad of factors - from timing in which a company pays transaction taxes to the interpretation of a new tax law - can have a crippling affect on cash flow, more and more companies are relegating transaction tax management to the top of the priority list.
The Conundrum: More Work, Less Resources
Transaction tax compliance is a legal obligation costing upwards of US$130,000-327,000 annually on staff, consultants, returns preparation, tax rate updates and more. However, if not done accurately, businesses risk significant exposure in audits, interest and penalties. In addition, with unrealistic timeframes in which business are often expected to comply within weeks of tax law changes, it should come as no surprise that a typical business gets hit with an average US$10,000-30,000 in penalties and interest each year.
Beyond the current market conditions, calculation and determination of taxes is not as simple as it might sound. Each transaction has unique characteristics that affect and change the specific tax rates applied depending on who, what, where, when, why and how the exchange was made. A business can face multiple, overlapping tax-collecting jurisdictions - countries, states, counties and cities - and tangled rules in the various tax authorities based on the type of business, location, nexus, or where the products and services will ultimately be used. Even for a small company, this can equate to countless hours updating tax rates tables, calculating tax, filing returns, reporting and auditing.
Add to the mix, a dynamic and fluid market, in which businesses are trying to cut costs only to be burdened with additional tax compliance requirements, companies are naturally finding it more and more challenging to remain in compliance.
A Recent Example of Real Cost Implications for Businesses - UK VAT Change
On 24 November 2008, the UK Chancellor announced a temporary VAT reduction from 17.5% to 15%, which took effect on 1 December 2008.
Within a week, over two million UK VAT registered businesses were required to make amendmentsto their systems or risk penalties, interest charges, additional transaction processing time and reconciliation costs.
In addition to the immediate changes, businesses are expected to carefully manage the reversion to the old rate on 1 January 2010, as any errors made will lead to a tax loss for the Exchequer. For affected businesses, achieving compliance with the new VAT rate requires considerable effort and is expected to cost £300m over two years.
Continued in Part 2
In my previous blog I talked about the total cost of sales & use tax compliance. However, I wasn’t able to go into details on each of the components of this cost. Let’s start digging into some of these components and how they can impact your company’s bottom line.
We can start with one of the costs that appears to be very basic and obvious, accounting or tax staff costs. Most companies that have sales & use tax responsibilities have many different people involved with the sales & use tax process. The most obvious people are the people assigned to compile, prepare, review, and send the sales & use tax returns. These people are traditionally in the tax, accounting or finance areas within the company. Sometimes these people are outside the company and can be part of accounting or tax consulting firms.
Identifying and quantifying the costs of these people is usually easier than the other staff costs that we will talk about in future blogs. For purpose of this blog, let’s dig into how you identify and quantify the costs of the compliance staff. Our definition of compliance will include the steps outlined above and should be expanded to include staff who do sales & use tax research and manage audits.
Quantifying the cost of the sales & use tax compliance contains two data elements: time and cost. The element of time is the actual time spent, including overtime, to complete all of the steps in the process. Gathering the amount of time spent can be done by doing time studies or through implementing timesheets. The element of time is critical because not all individuals may spend 100% of their time on the sales & use tax process. Going through the effort of gathering this information will result in more accurate data, which will ensure more accurate results.
The element of cost must be the fully-loaded cost of all individuals. Fully-loaded costs need to include all overhead and carrying costs associated with the individuals. Leaving out the overhead and carrying costs, can result in understating your costs by as much as 40%, which will not provide accurate results.
The last step, calculating the cost of sales & use tax compliance, is easy if you have taken the time to make sure the two data elements are accurate. The calculation step is simply multiplying the time by the cost for each individual involved. Once this is done correctly, you will have the first piece of your total cost of sales & use tax compliance.
Sales and use tax specialist such as Sabrix can assist a company with determining how much they are currently spending to manage their sales and use tax department.
Even though the European Union has the best intentions to simplify the place of supply rules, there are many different places where a service can become taxable. Businesses will have to study the rules carefully in order to comply with all the changes coming their way by January 1, 2010. If they do not use Tax Management Software, but manage their VAT tax manually, it will take time to set up a compliant Global Tax Management system.
The first question a company has to address is what type of service they are selling. The rules are different for cultural events, passenger transport, services related to immovable property, car rentals, restaurants or other services. It will be important to qualify the services properly, so that the correct place of supply can be assessed and VAT calculated.
Secondly, the business selling the service needs to determine the status of the buyer. If the buyer is a taxable person, it is considered a Business to Business (B2B) transaction. If the buyer is a non-taxable person, it is considered a Business to Consumer (B2C) transaction. The rules are different for a B2B transaction than for a B2C. For example, the rules vary from service type to service type when a service is provided to a customer. Normally, the seller would charge VAT in the country they are established in, but when the service is considered an electronic service, the seller needs to charge the VAT of the place where the buyer is established.
Finally, the place of supply can be in different locations. A service related to a cultural service (like a pop concert) is taxed where the concert is physically carried out. Passenger transport is where the transport takes place, and other services where the buyer is established. This either means that the seller needs to register for VAT where they perform the service, or they don't have to charge VAT, provided the buyer self assesses the VAT (so called reverse charge mechanism). In the map below, I have summarized the new rules.
You can find a full size nodemap here and an abridged version of the place of supply rules here.
The first question a company has to address is what type of service they are selling. The rules are different for cultural events, passenger transport, services related to immovable property, car rentals, restaurants or other services. It will be important to qualify the services properly, so that the correct place of supply can be assessed and VAT calculated.
Secondly, the business selling the service needs to determine the status of the buyer. If the buyer is a taxable person, it is considered a Business to Business (B2B) transaction. If the buyer is a non-taxable person, it is considered a Business to Consumer (B2C) transaction. The rules are different for a B2B transaction than for a B2C. For example, the rules vary from service type to service type when a service is provided to a customer. Normally, the seller would charge VAT in the country they are established in, but when the service is considered an electronic service, the seller needs to charge the VAT of the place where the buyer is established.
Finally, the place of supply can be in different locations. A service related to a cultural service (like a pop concert) is taxed where the concert is physically carried out. Passenger transport is where the transport takes place, and other services where the buyer is established. This either means that the seller needs to register for VAT where they perform the service, or they don't have to charge VAT, provided the buyer self assesses the VAT (so called reverse charge mechanism). In the map below, I have summarized the new rules.
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