Automation a Companys Best Ally

8/3/2019 Automation a Companys Best Ally

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AUTOMATION:A COMPANY’S BEST

ALLY AGAINST SALESTAX AUDITS



Automation: A Company’s Best Ally Against Sales Tax AuditsPage 2 o 13

There is no ormula that will guaranteea business’ sales and use tax reportswill never be audited, but that does notmean owners can (or should) do nothinguntil an audit occurs.

Automation can provide a proactivesales tax compliance vehicle that islexible, scalable and cost efcientor reducing audit risk, minimizingor eliminating penalties and interestand keeping up-to-date rules andregulations down to the rootop level.

Introduction

Calling sales and use tax management a challenge or everybusiness is an understatement. No one needs to be reminded o thepossibility o major fnancial repercussions when a taxing agencyquestions the fgures. Auditor fndings o improper or inadequatetax payments have led to the ailure o many businesses, despitecompanies’ attempts at compliance.

Owners may not realize their level o exposure to audits and the crippling fndings thatmay await them despite their best eorts to comply with the law. While larger busi-nesses and industries generally have the resources to plan and budget or sales anduse tax audits, most others simply cannot aord the luxury. Making matters worse,such audits are not easily predictable. As a result, many owners may not recognize thattheir tax reporting practices are likely to trigger the dreaded notice o a pending audit

rom the state.

There is no ormula that will guarantee a business’ sales or use tax reports will neverbe audited, but that does not mean owners can (or should) do nothing until an auditoccurs. Unortunately, in many cases, that’s exactly what happens when they rely onaccountants, manual processes, and limited sotware solutions in the hope that thereports they generate will satisy auditors. Today these methods are insufcient tohandle the countless number o tax laws and regulations, particularly or businessesoperating in multiple states or online. However, there is an alternative: technologicallyadvanced automation.

Automated solutions help businesses improve their reporting and worklow processesso they can comply with the myriad o sales and use tax laws and stand up to any

audit examination. In act, state-o-the-art automation ensures that each company isprepared and protected should an audit occur.




Problems and Challenges

Many companies have increased risk o sales and use tax audits by relying on manualreports and spreadsheets. “The errors associated with such methodology have contrib-uted to negative audit results subjecting the companies to have fnes/penalties andcost o corrective labor,”1 concluded one report that extensively detailed how business-es unwittingly leave themselves unprepared despite their best eorts at compliance.Statistics rom this research should be considered red lags or anyone in charge o taxcompliance. The fgures are proo positive about the risk o audit exposure and whetherit is unknowingly increased by relying on older technologies.

Those who responded to the survey had a variety o opinions about the top pressuresdriving company sales and use tax management policies and adoptions. Their answersillustrate the number o issues acing everyone rom CFOs to tax accountants to small

business owners.

Despite these pressures, it can be concluded that many companies still maintain whatis, at its core, a reactive tax management policy that relies on manual reporting, salestax tools unconnected to the rest o the operations, or tax tools contained within theirEnterprise Resource Planning (ERP) system. What is needed to ace the dizzying arrayo sales and use taxes is a proactive approach based on modern automated technol-ogy to decrease exposure risk while staying current with the countless number o changes in state tax regulations.

Survey Results

Top Pressures Driving Company Sales

and Use Tax Management Policies andProcedures:

• 49%—Compliance with jurisdictional rulesand regulations

• 47%—Increased activitiesby government auditors

• 43%—Lack o sta with tax expertise

• 34%—High cost o negative sales and use tax audits

• 27%—Mandate to increaseorganizational productivity2




Auditors Look Far Deeper ThanSimple Rate Calculation

Companies are likely to fnd that one o the biggest problems with insufcient taxmanagement policies is their inability to be comprehensive, let alone up-to-date onchanges to state tax laws. One reason is that earlier solutions were targeted to nicheareas, specifcally calculation. This ocus can be attributed to the growth in complexityo ever-changing tax ormulas leading companies and their accountants to concludethat manual calculation and tax sotware programmed or those ormulas oeredthe best chance at compliance and audit protection. Unortunately, this was a lawedresponse because o what they ailed to take into account: worklow and process.

Why are worklow and process so important? Because tax calculations do not occurin a vacuum and auditors know it, which is why calculations alone are not their onlyconcern. They also demand an explanation about the environment in which the cal-culations occur, an environment o worklow and process, two areas generally oreignto accountants whose reporting is based on calculations and ormulas.

The same holds true or tax reporting sotware that tends to be less comprehensive.For state auditors, that ocus is insufcient. They insist on a provable rationale be-hind calculations and computations. As many companies can sadly attest, auditorswill be more than skeptical i there is no easily understandable and provable processIt is an omission bound to lead to a fnding or recovery and a potential major hit tothe company’s bottom line.




State Sales Tax Fiscal Environment

Cash-starved state governments and the tax auditors who represent them are likelyto give companies little latitude on sales and use tax calculations, compliance, andreporting. Their relentless eorts appear to be paying o, as the U. S. Census Bureaureported in a recent summary o state and local government tax revenue.

According to the report, state tax revenue was up 5.21 percent. General sales taxrevenue ollowed that trend by increasing to $72.1 billion rom $69.3 billion above thesame quarter in 2009—an overall 4 percent increase3.

Among some o the states showing unusually large gains in sales tax revenue are:

• North Carolina—26.6 percent• Minnesota—24.2 percent• North Dakota—21 .3 percent• Utah—20.9 percent4

The lesson is clear: despite a down economy, state taxation departments have beenable to increase their collections by microscopically analyzing sales tax payments.There can be no question that some o those revenue gains can be attributed to inad-equate reporting that ell short o the auditors’ requirements, providing states with ad-ditional unds to help their dwindling coers and orcing companies to ace cash lowproblems due to costly tax penalties. This is another glaring example o an inadequate

tax management policy lacking satisactory audit protection and the problems don’tend there.

“Fourth ConsecutiveQuarter of Tax Revenue Gains”

- Report Headlines U. S. Census Bureau3




Any attempt to uncover an inherent exposure risk in a manual, or standard ERPsales and use tax reporting approach begins with an analysis o the company’sbusiness model. Chances are provisions or sales and use tax compliance have notbeen included, and it’s rare to fnd a model that contains them. As is oten the case,reporting and compliance are on the planning and budgeting back-burners whenthey should be up ront. That’s supported by another Census Bureau report that citesthe costs o sales tax compliance and penalties or non-compliance as major reasonsor many business ailures.

The cost o sales tax compliance can be as low as three percent o a company’sbudget, which is considered very efcient. However, this percentage is an unreal-istic expectation or companies that rely on manual and/or spreadsheet sotware

reporting. In act, some businesses may have to shoulder as much as 15 percent o their budget on compliance, which is a costly inefciency that can be easily avoidedthrough modern technology.

An alarming statistic in a recently published report shows that many fnancial ofcersunderestimate the cost o sales and use tax compliance by 50 percent because theyhave limited visibility and understanding o their billing and procurement processes.5 What should be even more troubling, especially or those companies that can least a-ord it, is that the average penalty cost o a negative sales and use tax audit is $34,000per occurrence, based on research o mid-market CFOs and senior fnancial ofcers.6

The same report highlights other hidden costs o manual and spreadsheet tax compli-ance. It fnds that preparing and remitting sales and use tax orms takes a ull 24 ac-counting days per year.7—expensive fgure regardless o company size. Researchers alsoound that on average, with the exception o very large companies, many businessescan expect to pay more than $327,000 annually or sales and use tax compliance.8

These fgures explain why more companies are turning to automated systems tohelp keep their sales tax reporting current, compliant, and cost efcient. They havetoo much to lose without the ability to present a ull picture o their worklow andprocess that an automated system can generate and auditors will demand to review.

Despite a down economy, statetaxation departments have beenable to increase their collections bymicroscopically analyzing sales taxpayments. Revenue gains in 2010can be attributed to increased auditactivity resulting in greater scrutiny andidentifcation o sales tax complianceissues. This scrutiny has resulted inincreased penalties and ees.

Hidden Costs




An Inside Look at State Audits

Businesses may wonder how their state determines the target o an audit or salesand/or use tax compliance. There is no clear answer. Targets or such examinations aredetermined by the states themselves, and the ormula or selecting the businesses isnever disclosed.

States tend to base many audits on a sampling o returns, however, there are other pro-cesses and patterns that can cause consideration. One obvious pattern is a question-able or inconsistent payment process that lacks adequate calculations, ormulas, andother documentation. State tax computers are likely to red-lag any reporting that ailsto stand up to what the tax authority views as a consistent and verifable process.

Ohio oers an example o what many state departments o revenue are likely to targetinsufcient or non-payment o use taxes, according to John Trippier, deputy auditor,Ohio Department o Taxation. “That is going to be our primary ocus,” Trippier said.

“From an audit perspective, 96 percent o our use tax audits generate liability a fgurethat should make any fnancial ofcer want to evaluate the company’s tax compliance

process. The Ohio deputy auditor said liabilities rom use and/or sales tax fndingshave been as high on some occasions as in the millions.”What he fnds even more sur-prising is the lack o knowledge about use tax compliance, including ailure to registerwith the state.

“We estimate 380,000 companies rom small to large have ailed to register or use taxcompliance and when we question them, what we usually hear is they didn’t knowthey had to register or were unamiliar with requirements,” Trippier said.Ü

There’s no question about it. State audits are on the increase.A study conducted by a marketing research frm has determinedthat a company can count on receiving one or more audit noticesa year.9 Even more surprising, the report notes that 33 percent o mid-market companies are just as likely to be hit with 11 or moreaudit notices.10

“We estimate 380,000 companies rom smallto large have ailed to register or use taxcompliance and when we question them,what we usually hear is they didn’t knowthey had to register or were unamiliar withrequirements.”

- John Trippier




He disclosed that state examiners are likely to target companies that have registeredor sales tax reporting but have overlooked the same responsibility or use taxes. Thatoversight changes the scope o the audit. For registered Ohio companies, the auditorsrequire only our years o documented transactions; or the unregistered, the auditorswill demand to see seven years o transaction records. From the audit and penalty side,that can be costly.

Trippier agreed that a documented process is critical to resolving any potential issues—and that, too, is a problem or companies that do not realize its importance and havenothing in place. “Sometimes there is no process,” he said. The auditor indicated that alack o process can make it even more difcult or a company to justiy its calculationsand payments.

Trippier said his experience with automated sales and use tax reporting has been verypositive. “They defnitely help,” he said. “I’ve ound that their reports contain a sub-stantially correct amount o liability:

Businesses can and should expect an audit notice rom the state under some condi-tions. The most obvious is a new registry on the tax rolls since that would be the frstrecord the state has o the company’s operations. A decision to audit can also be basedon a mere statistical sample o business reports or it could be triggered by inormationprovided to the taxing authority including in the orm o a complaint.

In act, it is this whole concept o ”triggers” that tends to escape manual and spread-sheet reports, but is expressly covered with automated reporting. One such item in-cluded in automated audit protection, but not likely ound in traditional tax manage-ment approaches, is a high dierence score between a company’s report and the norma department o revenue or taxation expects.

High dierence scores are always red-lags or examiners, but accounting-only sot-ware is unlikely to uncover them. Another obvious trigger is a report or lack o one thatcovers all sales channels such as direct, retail, and Internet. I the company is a manu-

acturer, expect the state to look microscopically at any agreement the company haswith its ulfllment house on remitting sales and use taxes.

Exemption certifcates can be triggers as well. Taxation departments tend to questionwhether all non-taxed transactions are in line with the certifcate, and a thoroughanalysis o such transactions is mandatory as part o an audit protection plan. “Manyvendors don’t get properly completed exemption certifcates,” said Ohio’s Deputy Audi-tor Trippier.

A dierent potential trigger exists or use tax liability. This trigger ocuses on the issueo nexus whether a business has a physical presence or connection in a state. At onetime, companies could use the decision by the U.S. Supreme Court in Quill Corporationv. North Dakota (1992) as a guideline. In that case, the court ound that the state could

not require Quill to collect and pay a use tax on sales shipped into North Dakota unlessthe company had a substantial nexus there. The state had argued that Quill’s sotwareuse in the state qualifed it or the tax, but the Supreme Court disagreed based uponthe absence o a physical presence or connection.11

Now some states are trying to redefne ”substantial nexus” because o widespread In-ternet business, and that creates even more tax planning problems and audit concernsor businesses a problem that is easily addressed by automation services.

Auditors have ound thatautomated systems “...defnitely help”or improving sales tax audit’s resultsin showing company compliance.

Triggers for sales taxaudits include:

• Poor, manual processes

• Inconsistent reporting

or the industry

• Unusual amount o

non-taxed transactions• Statistical eventuality




Automation Solutions

Fortunately, automation solutions are designed to uncover salesand use tax oversights.

The rise in popularity o automated sales and use tax audit solutions represents amajor shit in the marketplace. Until the advent o this highly developed technology,only larger corporations with multi-million dollar budgets could aord sales and usetax compliance solutions. Mainstream businesses had no choice but to rely on ac-counting departments, which, as we’ve seen, tended to overlook such critical issues asprocess and worklow. Not anymore. Aordable automated solutions are available orbusinesses o all sizes.

With more sophisticated automation solutions on the market, companies are turningto providers who can prove that their systems oer consistent process and predictableworklow models that provide content and compliance accuracy. For that reason, taxtechnology companies have become industry thought leaders who have proven them-selves capable o developing more cost-efcient and technically sound approaches.

In short, automation is all about preparation. One o its most appealing unctionsis the ability to provide a consistent, documented, and predictable process, which isexactly what state examiners want to see. The same applies to worklow, which isautomated in its entirety rom tax preparation through remittance, but not likely oundin spreadsheets and accounting-only sotware.

Any response that lacks what auditors view as critical inormation is likely to be seizedupon as inadequate, and a potential target or a notice o audit. The last thing any

company needs is or examiners to question the rationale behind reports and concludethey are merely constructs designed to avoid payment o legitimately owed taxes. Thisis a point that cannot be understated. Auditors want to reassure themselves about aprocess that comprehensively explains and justifes each transaction.

Automated solutions are nowaordable to businesses o all sizes.Cloud-based solutions enable alexible pricing model or transaction-based ees.

Comprehensive services integrateseamlessly with your ERP and taxdecision sotware to ensure yourworklow and processes maximize

compliance.




Executive Envelope:The Challenges and ResultsExecutive Envelope: The Challenge

Executive Envelope, an envelope and printing solution provider in Caliornia, can at-test to the importance o process and its impact on audits. The company, a leadingprovider o printing projects, graphics, and trade show materials with annual sales o $15 million, underwent our consecutive sales tax audits triggered by outdated manualaccounting practices or calculating sales and use tax payments. Auditors discoverednumerous errors, increasing the company’s audit exposure along with the potential orcrippling fnes. “Our old-ashioned manual process didn’t work or us and it was trulybroken,” said Claudia Brake, ofce manager.

The company, while recognizing the need to automate its transactions, also requiredintegration with its tax fling process. Executive Envelope chose an automated programthat easily integrated into their ERP system and gave the option o selecting a singleschedule applicable to all customers while automatically maintaining all tax sched-ules and details.

The Results

The company’s audit vulnerability has been diminished and it has not had to ace anysignifcant audit issues. Tax amounts are accurate and liabilities are directly submit-ted by the program to individual state revenue departments. Because the companyno longer has to manually update schedules or rate and boundary tax modifcations,Executive Envelope estimates a labor cost savings o $36,000 annually.

Executive Envelope’s experience demonstrates just a ew o the benefts o automatedtax calculation and reporting. Here are several others, all o which are important con-siderations or companies planning their sales and use tax strategies:

• Validation and rate calculations. When there is adequate worklow and processdocumentation as the basis behind validation and rate calculations, examinersare less likely to challenge the computations.

• Jurisdiction research. Instead o the company spending costly accounting timeresearching jurisdictional liabilities, the automated system, which is constantlyupdated, can quickly resolve any questions.

• Potential nexus issues. Several states are attempting to redefne the Quill deci-sion regarding nexus. Through automation, up-to-date nexus defnitions areavailable immediately.

• Exemption certifcate management. Automation contains sophisticated logicthat can work with complex ormulas in states to justiy all non-tax reporting aspermitted by the certifcate. It can greatly reduce, i not eliminate, audit exposure

or non-taxed transactions.• Integration. As shown with Executive Envelope, automated systems can integrate

into most ERP systems, and fnancial applications, to increase billing accuracy.• Manpower cost efciency. Automated systems have increased capabilities o

reducing work time and costs that are lost through manual eorts at compliance.

Businesses may wonder whether the amount o documentation they have is adequateexcessive, or not enough should they receive a notice o audit. The algorithms thatenable an automated system’s logic eliminate those worries by providing the correctdocumentation, which helps assure its acceptance by the taxing authority.




There is no shortage o companies whose experience mirrors that o Executive Enve-lope in fnding that automation greatly reduces their audit exposure, while producing acost-efcient, tax compliant process.

Logos Bible Sotware, a global provider o educational sotware or clergy, students,and missionaries, headquartered in the state o Washington, ound that its manualmaintenance o tax jurisdictions, sales tax calculations, and timely fling was inconsis-tent and inadequate or keeping up with the frm’s growth. Logos turned to an auto-mated solution, which promptly proved itsel ater the company received a notice o audit rom Texas, its second largest nexus state in terms o sales, according to AndrewSkipton, Logos chie fnancial ofcer.

“It was a simple matter o providing the examiner with the monthly reports weused in preparing the tax returns,” Skipton said. “Our audit resulted in a no-tax dueexamination.”

The challenge was even greater or the Miner Corporation, an industrial equipmentsupplier and service provider based in Texas. Miner conducts business in all 50 states,Puerto Rico, Canada, and Mexico. The company has had to deal with thousands o tax-ing jurisdictions that encompass a variety o cities, counties, and states.

Miner estimates that it has had to endure rom 700 to 900 changes in boundaries, taxrates, and regulations yearly. In its previous manual approach, Miner had to calculateits sales tax liability based on each customer’s delivery address. Then, sales agents had

to conduct time-consuming Internet research to determine the tax rate or each localeand enter it into the sales order. All o this took an inordinate amount o time, approxi-mately 10 to 14 days each month, to research tax changes, determine proper rates, andfle returns.

Recognizing that automation was its only answer, Miner selected an automated sys-tem that perormed as promised. Michael McGinn, Miner’s senior tax accountant, saidan audit that covered the period beore and ater the new system was implemented,was telling in what it revealed.

A number o additional case studies show similar positive results or users o auto-mated sales and use tax management. Several fndings are consistent through all o

them: work hours and subsequent costs or compliance are reduced; calculations areperormed behind the scenes in the automation process; and tax rates are updatedautomatically. When validation, rules and ormulas are accurate, the company is arless likely to fnd itsel a target on a state department o revenue audit list.

“The accuracy and detail ater[automation] was ar superior, plusthe inormation is readily available,”McGinn said. “The auditors wereimpressed.”

Results from the Field




Conclusion

The costs associated with non-automated approaches to sales and use tax complianceare onerous, unacceptable, and deleterious to the bottom line o the majority o com-panies. Companies that rely solely on manual accounting solutions or disconnectedtax tools that ignore worklow, process, and their role in audit preparation and protec-tion do so at their own peril. They may be unintentionally pulling one o those triggersthat could lead to an audit notice, an expensive and time-consuming response, and aneven more costly and potentially lethal fnding or recovery.

There is a reason automated solutions represent a cost efcient and comprehensive

solution to the ever-present risk o state audits. They are, in essence, a revolutionarychange in a marketplace that has come to recognize a consistent process and predict-able worklow or all transactional tax reporting as undamental to any audit strategy.

Automation is the clearest and best method to graphically display policies andprocedures or a competent and, most Important, compliant system o tax reporting.Organizations can have peace-o-mind knowing that their automated solution meetsand exceeds standards that auditors expect rom each business. Just as importantautomated tax reporting can greatly diminish audit vulnerability, a best-case scenarioor every business.




Based on Bainbridge Island, Washington, Avalara is transorming the sales and use tax complianceprocess or businesses o all sizes. With point-and-click ease, Avalara provides the astest, easiest, mostaccurate and aordable way or companies to address their sales and use tax compliance. Avalara is theindustry’s most trusted provider o solutions, serving more than 40,000 registered users located through-out the U.S., Canada and abroad, delivering more than 350 million sales tax transactions, and fling andremitting more than $10 billion in tax collections per year.

End Notes1 Aberdeen Group. “Eective Sales and Use Tax Management: Reducing ErrorsProductivity.” May 201 0.2 Ibid.3 U.S. Census Bureau. “Quarterly Summary o State and Local GovernmentTax Revenue.” December 2010.4 Ibid.5 PayStream Advisors. “Tax Compliance: Cost-Eective Technology and ManagedServices Drive Accuracy.” March 2009.6 Tallman Insights and Mindwave Research. Independent Study o 500 mid-marketCFOs and Senior Financial Executives. October 2006.7 lbid.8 lbid.9 lbid.10 Ivbid.11 Quill Corporation v. North Dakota, 504 U.S. 298. 1992.12 Nexus determination should result rom a detailed nexus study that is conductedwith ull exposure to the acts o your business. Automated tools are intended toprovide general guidance based on well established principles o the nexus creatingactivities o a business.

Getting started with Avalara AvaTax is easy.Take the next step toward automating your sales tax process.

Call: 877-780-4848Visit: www.avalara.com

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Automation a Companys Best Ally