| By Scott H. Cytron, ABC
Greg Rosser is an executive director, and the national Sales and Use Tax Automation practice leader at Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. He has 20 years of process automation experience in industry and public accounting, developed numerous custom tax applications and integrated third-party tax engines with various financial systems. Greg is author of Automate Your Sales and Use Tax Process to Reduce Costs.
Scott Cytron: What do you do in your role with Grant Thornton?
Greg Rosser: Our main role is to identify and reduce tax risk for companies – the risk that a company will either overpay or underpay its sales and use tax liability as a result of internal factors – current processes and procedures – or as a result of external factors – companies with whom they do business.
SC: What did you do prior to GT?
GR: Just prior to GT, I was with KPMG for 10 years. In addition to tax software integration work, I created and led a regional sales tax compliance group. I also developed numerous software applications focused on process and tax savings. One of these is a system that manages captive procurement company transactions (e.g. leases) and reporting. |
Greg Rosser, Executive Director
Grant Thorton LLP |
SC: How does a company automate its sales and use tax process? What are the steps involved in setting this up?
GR: There are several areas where automation can be employed in sales and use tax. The most popular areas are automating the tax determination and calculation, and automating compliance reporting.
Automating tax determination and calculation is a longer project with many design factors to consider. At a high level, these projects are broken down into various phases, including planning and analysis, design, system integration and configuration, testing, and training and post production support.
In general, there must be a period of detailed knowledge-gathering about a company, its processes and systems capabilities. This information is compared with the capabilities of the tax software application, then a gap analysis is conducted. Critical gaps will require further investigation to determine the best alternatives to resolve these gaps.
For example, a company needs to provide a product code to the tax software in order to determine an accurate tax amount based on the kind of product sold or purchased. If the product code is entered into a free-form field in the ERP system, there’s a high probability that data entry errors will result in an illegible code that the tax software doesn’t recognize. One solution to this gap might be to alter the ERP system’s data entry screen to present a strict listing of product codes from which to choose.
Once gaps are resolved, the tax software is configured to accommodate all appropriate data elements and the various tax scenarios a company might face. For example, an energy company will determine tax differently when purchasing a valve for use in a terminal tank farm area versus when a valve is purchased to use in the manufacturing process. Another scenario would exist for companies who hold a direct pay permit in Texas. In this case, the configuration may require that any tax billed on a vendor’s invoice would be automatically short-paid if the company follows a strict practice of self-accruing and remitting tax in Texas.
Once the configuration is complete, the project will move into testing. There are varying levels of testing, with some occurring during configuration. For the most part, we want to conduct system tests and user acceptance tests to provide confidence that the configurations are working as designed.
Training can be conducted once testing is complete. Training will encompass how the Tax Department uses and maintains the new tax software. It can also include training accounts payable, purchasing, order entry and fixed asset personnel on how data inputs should be conducted going forward.
Once the tax application is moved into a production environment, it’s common to begin a period of review to confirm all is working as designed. This is commonly referred to as “Post Production Support.”
It’s important to note that most tax determination software applications are not plug-and-play. These are commonly offered as on-site server installations with large relational databases potentially on yet another server, or as a Software-as-a-Service (SaaS) offering. With SaaS, the main difference is that the software remains on the tax software vendor’s servers and is accessed through the internet.
Not every company has the same issues, systems and processes, so one approach does not solve the many problems. Other areas where automation can be leveraged include tax return compliance reporting, exemption certificate management, tax data repository for analysis and audit support, procurement company transaction management, and general ledger reconciliation and reporting.
SC: How does this automation reduce costs, and can you provide an example of how much a client saved?
GR: I can give you a number of examples of how sales/use tax automation can reduce costs. It:
- prevents unnecessary cash outlays from improperly over-calculating and remitting taxes, or failing to accurately assess taxes billed by another company.
- reduces the costs of recovery associated with filing refund claims.
- prevents underpayments that may result from erroneous tax calculations typically due to incorrect tax rates, improper interpretation of tax law, or failing to accurately assess taxes billed by another company.
- reduces penalty and interest from tax assessors due to underpayment and/or un-timely filing.
- reduces internal cost of managing content such as tax rates, nexus and taxability research across thousands of tax jurisdictions.
- reduces the risk of potential lawsuits as a result of systemic tax over billing (e.g. class action suits).
- reduces risk of improper tax determination made by organizations beyond the boundaries of the tax department. This includes:
- customer service representatives who establish a new client as an exempt organization based on limited information or incorrect exemption certificate documentation.
- Order-entry personnel who set invoice or line-level taxability based on the direction of the customer, or on incomplete/outdated product taxability guides. Scenarios such as bundling products and services together can raise the level of complexity as well.
- accounts payable resources commonly tasked with determining whether use tax should be accrued, or with determining the accuracy of taxes billed by a vendor on an invoice.
- reduces the internal cost associated with reviewing and correcting the work of tax determinations made by organizations outside of the tax department.
- eliminates the tax department reliance upon IT resources to provide electronic transaction data for audit support.
- significantly reduces the cost of manually preparing tax returns through the use of signature-ready return preparation software.
Modeling tools can assist with deriving return-on-investment scenarios. The scenarios are commonly projected over a five-year period and take into account factors such as internal cost of capital, audit assessment history, tax accuracy error rates, internal cost of IT support, number of internal systems, and average effective tax rates.
In a real example of a company with $2.7B in annual U.S. revenue, the company was able to recover the initial automation investment within 10 months. The projected ongoing annual sales and use tax savings were $1.8M.
SC: What are the intangible benefits to this?
GR: By leveraging automation, tax organization personnel can detach from the daily chores of tax content management and transaction accuracy reviews to focus their effort on more value-added work, such as strategic analyses that produce further tax savings. Automation, done properly, increases the accuracy of tax determination. This, in turn, can result in reductions to tax reserve mandates. Finally, automation through the use of third-party tax applications can isolate ownership of the tax determination process to where it belongs – tax professionals within the tax organization.
SC: I know you’re familiar with SpeedTax; I featured Anton Donde in a previous Ideas in Motion. What do you like about SpeedTax’s solutions?
GR: SpeedTax is a great example of a third-party tax software suite that is truly integrated. SpeedTax falls in the SaaS category, which is attractive to companies seeking to eliminate elements of the internal system cost of ownership, including software updates and patches, server and disk space; operating systems; database licenses; network patrol applications; virus scanning software; backup, redundancy and recovery processes; license management; electricity and floor space; system audit costs; and scalability and replacement issues.
SpeedTax manages its own content for rates and taxability, and allows for mapping a company’s product codes to match those in SpeedTax. If you’re a retailer, you no longer need to maintain tax research in more than 6,000 tax jurisdictions on the taxability of running shoes. SpeedTax also works with customers to add to its tax research content thereby supporting an ever growing range of content.
SpeedTax also provides a signature-ready compliance reporting application that fits tightly with its tax calculation engine. At any time, you can open a tax return that immediately reflects a period’s transaction processing results. This can be useful for companies required to make estimated pre-payments before an actual tax return is due.
SpeedTax provides a mechanism to filter and review transaction detail, and if necessary, make adjustments. In addition, several canned reports provide information views, such as jurisdictional reconciliation reports, funding request forms, transaction details, transactions by tax return, and taxes left unapplied –a good source for staying on top of nexus issues.
SC: Some accountants have a hard time talking with their clients about sales tax issues; can you give me a few ways you and GT discuss this so they understand what they need to do to comply with filings and reporting requirements?
GR: Simply understanding a client’s industry and issues can go a long way. There are issues commonly shared by all clients in all industries. In addition there are issues and nuances that are peculiar to certain industries. For example, a company in retail and a company in manufacturing will both have a need to produce an accurate and timely tax return. However, if you dig into their respective industries, you’ll find that retailers typically deal with issues such as credits, returns, coupons and other items that manufacturers don’t normally come up against.
Likewise, manufacturers are more interested in how they can best take advantage of manufacturing exemptions, whereas retailers will be concerned about exemptions for sales to charitable organizations and sales tax holidays. Being able to converse on a vast number of sales and use tax topics across industries can be the difference in whether a client chooses to use our services.
It’s one thing to understand a client’s industry, and yet another to understand how a company operates internally. I find a great way to understand a company’s operations is to conduct a process review focusing on sales and use tax. This is a series of interviews with questions designed to understand how information moves through a company and uncovers critical “tax touch points.”
The review is a good way to identify issues or risks based on a company’s current processes and helps further cement relationships - and not just in the tax organization. The review can include members from accounts payable, procurement, sales and marketing, customer service, fixed assets, project accounting, inventory management, information technology, and tax.
Many times, we’ll reach out to our client base upon news of a tax law change that may impact their particular industry. Prior to reaching out, we will analyze the possible impact to our clients and list the opportunity areas for discussion. This may result in suggestions or recommendations around compliance, nexus determination, refund opportunities or process automation.
It’s also important to note that client’s respond differently. Some clients appreciate frequent communications, while others prefer discussions only when events dictate a need or opportunity to react, e.g., legislative. How well you know your clients is a critical element in developing and maintaining good relationships. Once a solid relationship is formed, talking to client’s about sales tax issues can be second nature.