Presenting a live 110‐minute teleconference with interactive Q&A
Exemption Certificate Management in Sales Tax ComplianceSharpening Your Company's Approach to Verifying, Storing and Retrieving Certificates
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, MARCH 29, 2012
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
Tony Turner, Regional Manager, CertCapture, Houstony , g g , p ,
Steve Oldroyd, Tax Senior Director - Sales & Use Tax, Property Tax, BDO USA, San Jose, Calif.
Sean Evans, Director, Tax Advisory Services, DuCharme McMillen and Associates Inc., Overland Park, Kan.
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E ti C tifi t M t i Exemption Certificate Management in Sales Tax Compliance Seminar
March 29, 2012
Sean Evans, DuCharme McMillen andAssociates [email protected]
Steve Oldroyd, BDO [email protected]
Tony Turner, CertCapture [email protected]
Today’s Program
Trends In State And Local Sales Tax Audits[Steve Oldroyd]
Slide 7 – Slide 12
Procedures For Gathering, Validating Certificates At The Purchase Location[Steve Oldroyd]
Slide 13 – Slide 17
Audit-Related Issues[Sean Evans]
Slide 18 – Slide 39
Evaluating And Applying Technology[Tony Turner]
Slide 40 – Slide 51
TRENDS IN STATE AND LOCAL Steve Oldroyd, BDO USA
SALES TAX AUDITS
BackgroundBackground
Sales tax is generally one of the largest sources of revenue for a state.
Approximately one-third of all state revenues are derived from the collection of sales and use tax nationally.
State budget deficits
Sales and use tax audits major source of a state’s revenue • Increased number of audits• Increased exemption and resale certificate documentation required• Increased exemption and resale certificate documentation required• Effects of missing certificate in an audit sample
8
Sales TaxSales Tax
Seller is required to charge and report sales tax on all taxable sales Seller is required to charge and report sales tax on all taxable sales made within the seller’s home state
A ll i i d t h d t ll ’ t i t t t A seller is required to charge and report seller’s use tax on interstate sales when the seller has nexus or has voluntarily registered to collect in a state.
9
SalesSales
All sales are taxable unless exempted by statute: U.S. government Resale ServicesServices Interstate and foreign commerce Manufacturing Research and development Research and development State and local governments Not-for-profit
10
Exemption Certificates Exemption Certificates There are three basic types documentation to support an exempt sale:
Resale certificates Exemption certificates Manufacturing Research & development Pollution controlPollution control Not-for profit Government Di t tifi t Direct pay certificates
11
Exemption Certificates (Cont ) Exemption Certificates (Cont.)
Exemption/resale certificates must be taken:
Good faith Timely Timely Signed Dated Buyer’s registration number notated Buyer’s registration number notated Describe the buyer business Describe the property purchased Acceptable format for the state
12
PROCEDURES FOR Steve Oldroyd, BDO USA
GATHERING, VALIDATING CERTIFICATES AT THE CERTIFICATES AT THE PURCHASE LOCATION
Exemption Certificate PolicyExemption Certificate Policy
Always obtain resale certificates from customers!
Copies of the sales/use tax permits are not acceptable. Incomplete certificates are unacceptable.Incomplete certificates are unacceptable. Blanket is good for all future sales to customers until cancelled in
writing or overridden. A taxable purchase order may override a blanket certificate A taxable purchase order may override a blanket certificate. Specific certificates “See Purchase Order” for taxability. If an exemption certificate is not on file, the state can assess the tax
against the seller against the seller.
14
Recordkeeping And ExemptionRecordkeeping And ExemptionCertificate Management
Maintain timely and valid exemption certificates
Routinely update exemption certificates
Never destroy an exemption certificate Create a permanent file for original Work off copy or electronic exemption certificatespy p
15
Responsible Party? Responsible Party? Accounts receivable department Credit department Store managers General accounting Tax department
Routinely update exemption certificates y p p
Never destroy an exemption certificate Create a permanent file for original Create a permanent file for original Work off copy or electronic exemption certificates
16
TrainingTraining
Policy and training manual y g Formal policy manual Instructions on acceptable exemption certificates For each responsible department For each responsible department
Formal training classes Contact information
Periodic meetings with various departments Policy changes Law changes Audit issues Customer issues
17
AUDIT RELATED ISSUESSean Evans, DuCharme McMillen and Associates Inc.
AUDIT‐RELATED ISSUES
BUDGET GAP 2011
WAAK ME
VT
NHNYMIWI
MNND
SDWY
MT
WA
IDOR
MA
CTPA NJ
MDDC
DE
VAWVIL OHIN
MI
KYMOKS
IANE
COUT
WYNV
CA
RI
HINC
SCGA
TN
ALMSLA
TX
OKNMAZ AR
LA
Source: National Conference of State Legislatures
Key:
More than 15% of the state’s general fund
10% to 15% of the state’s general fund
Less than 10% of the state’s general fund
FL
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“Update On State Budget Gaps: FY 2011”Less than 10% of the state s general fund
Not applicable
BREAKDOWN OF STATE AND LOCAL TAX REVENUE
T b i t 36%Taxes on business property ‐ 36%
Sales tax on business inputs ‐ 22%
Excise, utility and insurance taxes ‐13%
Corporate income tax ‐ 9%
Unemployment insurance tax ‐ 5%
Individual income tax on business income ‐ 6%
Business license and other business taxes ‐ 9%
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Estimates based on data from the U.S. Census Bureau, State & Local Finances
Missouri
Sales and purchase
Audit
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MISSOURI: SALES AND PURCHASE AUDIT
Audit assessment
Assessment Calculation % of Total Assessment
Exemption Certificates ‐ Invalid or Unable to Retrieve 0%
Taxable Fixed Assets 19%Taxable Fixed Assets 19%
Taxable Expense Items 81%
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MISSOURI: SALES AND PURCHASE AUDIT (CONT.)
Results: Purchase side Fixed assets
• Auditor reviewed 100% of fixed‐asset purchases.• No use tax accrued (general maintenance machinery and Equipment• No use tax accrued (general maintenance, machinery and Equipment,
truck lease, etc.) Expenses• Auditor sampled expense items.• No use tax accrued (lubricants, general maintenance, etc.)• Purchase cards
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MISSOURI: SALES AND PURCHASE AUDIT (CONT.)
Results
Exemption Certificates Sampled by Auditor Result % of Total SampledExemption Certificates Sampled by Auditor Result % of Total Sampled
On file and valid 48 94%
Retrieved from customers 2 4%
Invalid or unable to retrieve 1 2%
Total Exemption Certificates Sampled By Auditor 51 ‐
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Florida
Sales and purchase
Audit
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FLORIDA: SALES AND PURCHASE AUDIT
Results
Exemption Certificates Sampled By Auditor Result % of Total SampledExemption Certificates Sampled By Auditor Result % of Total Sampled
On file and valid 48 94%
Retrieved from customers 2 4%
Invalid or unable to retrieve 1 2%
Total Exemption Certificates Sampled By Auditor 51 ‐
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FLORIDA: SALES AND PURCHASE AUDIT (CONT.)
Results: Purchase side Fixed assets
• Auditor reviewed 100% of fixed‐asset purchases.• No use tax accrued (general maintenance machinery & equipment• No use tax accrued (general maintenance, machinery & equipment,
truck lease, etc.) Expenses
• Auditor sampled expense items.• No use tax accrued (lubricants, general maintenance, etc.)• Purchase cards
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FLORIDA: SALES AND PURCHASE AUDIT (CONT.)
Audit assessment
Assessment Calculation % of Total Assessment
Exemption certificates ‐ Invalid or unable to retrieve 0%
Taxable fixed assets 19%Taxable fixed assets 19%
Taxable expense items 81%
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DROP SHIPMENT: WHAT IS IT?
Involves at least three parties and two sales
Retailer:1. Accepts an order from a customer,2 Purchases goods from a third party and2. Purchases goods from a third party, and3. Directs third party to deliver goods directly to customer.
Third party sells to retailer, which sells to the customer.
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DROP SHIPMENT: RESALE EXEMPTION?
General rule: Most states exempt the third‐party supplier’s sale to the retailer as a sale for resale.
Retailer gives the third‐party supplier a resale certificate.
Which state’s certificate and tax registration number?
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DROP SHIPMENT: WHICH STATE?
If both the retailer and third‐party supplier are registered in the destination state, the retailer uses that state’s resale certificate and registration number. Retailer collects that state’s tax from customer.
If neither the retailer nor the third‐party supplier is registered in the destination state, neither is required to collect that state’s tax. The customer owes use tax.
A tax problem may arise when the retailer is not registered in destination state but the third‐party supplier isstate, but the third party supplier is.
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DROP SHIPMENT: RETAILER NOT REGISTERED?
What if the retailer is not registered in the destination state, but the third‐party suppler is?
Most states allow the retailer to use its home‐state registration number Most states allow the retailer to use its home state registration number on the destination state’s certificate or on a multi‐state certificate.
The retailer purchases an item tax free but isn’t required to collect the The retailer purchases an item tax‐free but isn t required to collect the destination state’s tax. The customer owes use tax.
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DROP SHIPMENT: WHAT’S THE PROBLEM?
What if the retailer is not registered, but the third‐party suppler is?
A few states don’t exempt sales to a retailer that is not registered in the state. A third‐party supplier registered in these states must collect taxstate. A third party supplier registered in these states must collect tax from the retailer. Examples:
California Florida Florida Louisiana Oklahoma
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DROP SHIPMENT: WHAT’S THE TAXABLE AMOUNT?
What if the retailer is registered, but the third‐party suppler is? (Cont.)
Most of the problem states require a third‐party supplier to collect tax on its sales price to retailer The customer owes tax on theon its sales price to retailer. The customer owes tax on the difference.
Exceptions: California: Supplier must collect tax on sales price to retailer
plus 10% markup,plus 10% markup. Massachusetts: Supplier must collect tax on retailer’s price to
customer.
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NATURE OF DOCUMENTATION
There are many different types of exemption certificates.There are state‐proscribed forms issued for several purposes.The Multistate Tax Commission (MTC) issued a certificate for resale
purposes.Purposes of exemptions:
Resale Industryy Property Exempt organization Direct pay permit holdersDirect pay permit holders
Must be taken in good faithObtained in a timely fashion
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NATURE OF DOCUMENTATION (CONT.)
Most states allow certificates to be maintained indefinitely.Other states have specific expiration periods for exemption certificates.
Proper internal controls and a formal certificate management system should minimize tax exposure in this area.
C l t f lid tifi t ifi d d i ditCommon elements of a valid certificate verified during an audit:
Seller’s and purchaser’s names and addresses
Seller’s and purchaser’s registration number Seller s and purchaser s registration number
Business description of purchaser
Description of property purchasedDescription of property purchased
Statutory reference of item being purchased
Date (on or before date of sale)
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Authorized signature
MOST ORGANIZATIONS HAVE A MANUAL PROCESS FOR EXEMPTION CERTIFICATES
Who Can Accept Customer Exemption Certificates?
Exemption Certificate Management Automation Level
15%10%3%
21%
28%31%
7%
13%
72%
Customer service representativeTaxSalesAll of the aboveAnybody can accept exemption certificates
Manual
Semi-automated
Automated
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We do not accept exemption certificatesAutomated
“GOOD FAITH”
Non‐SSTP full‐member states face two requirements: Must have the appropriate certificate in file under the correct time frame
required Must be believableMust be believable If both of these requirements are not proven, the state can refuse the
exemption under audit. The burden of proof of exemption is on the SELLER The burden of proof of exemption is on the SELLER.
States using the SSTP exemption form: Must have the appropriate certificate on file under the correct time
frame required The burden of proof of exemption is on the BUYER.
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STREAMLINED STATE STATUS AS OF 2012
WA
Streamlined State Status 10-01-09
AK MEVT
NHNYMIWI
MNND
SDWY
MT
WA
IDOR
MA
CTRIPA NJ
MDDE
VAWVIL OHIN
MI
KYMOKS
IANE
COUT
WYNV
CA DC
HINC
SCGA
TN
ALMSLA
TX
OKNMAZ AR
Full‐member statesKey
FL
LAFull member states
Associate member states – Flex to full
Advisory states – Not conforming
Non‐sales tax states
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Project states – Not advisory
Non‐participating state
EVALUATING AND APPLYING Tony Turner, CertCapture
EVALUATING AND APPLYING TECHNOLOGY
Technology
• Certificate automation is a growing trend.
• Audit response time improves significantly, reducing the number of hours required g qto locate certificates.
• Audit liabilities reduce significantly as a direct result f d iof automated reporting,
tracking and features‐rich soft aresoftware.
41
Audits
• Companies of all sizes, small and large, face potential liabilities from certificate pexposure.
• Manual systems provide the mostManual systems provide the most exposure. It can be difficult and costly to maintain these on an ongoing basis.
• Certificates represent easy targets for auditors when they expire, or when y pcompanies go out of business or are purchased.
42
Alternatives To Storing Certificates
• Indexing and scanned images– A good start but falls short ofA good start, but falls short of providing measurable ROI
– Referred to as “dumb scans,” digital images continue to present
i t i d i ditmaintenance issues during audit engagements.
– Certificate validation remains a significant issue when a taxpayer is only maintaining images. 43
Automation
• True certificate automation provides easy reporting features that track and provide reporting on:p p g
– Expiration dates– Missing certificates– Invalid certificates– Nexus requirements– Audit reportsp
44
Automated Request And Collect
Exemption Certificates
@
Certificates
@E-mail, mail, scan, fax and Web portal
Automated requests for certificates are sent in
multiple formats.
Accepts certificates from various sources and stores them as pdf files
ECM SolutionECM Solution45
Integration
Exemption
E-mail, mail, scan, fax and Web portalCertificates
ECM SolutionCustomer
Data Feed
Export FilesAPITax
ERP
SAPVertex
OneSource
CCHFeed APIsoftware
ORACLESAP
ADP TaxwareOneSource
46
Cost Vs. Benefit
• Traditional manual systems can present hidden tax traps that may result in i ifi li bili isignificant liabilities.
• Certificate management software can be glow‐cost and easy to implement; provides quick and easy audit response tools.
• It reduces the time required to gather certificates. It allows you to monitor validity on an onto monitor validity on an on‐going basis and always know the state of your certificate database with little effort.
47
Certificate Policy
• What are your company SOX requirements regarding certificate maintenance?regarding certificate maintenance?
• Can certificates be tracked to specific pindividuals who are responsible for validating certificates?
• What type of history can be d d i d i fproduced in order to satisfy
compliance issues?
48
Certificate Retrieval
• How quickly can certificates be retrieved using automation, and be provided to the auditor?– Automated tools eliminate the arduous amount of time required to gather and prepare for an audit review.
– Response can be as easy as copy and paste.
d h b• Does an auditor have to be on‐site to review certificates?– With automation, validated reports are accessible , ponline, without an auditor having to be on premises.
– Advanced audit tools are available to manage how long an auditor can have access to various reportslong an auditor can have access to various reports.
49
Existing Technology
• What is in place now?
– Manual retrieval from deep, dark dungeons? – Old certificates with ink that is difficult to read?– Does anyone really know what is on file?– Expired certificates?p– Missing certificates?– Valid certificates?Valid certificates?– Dumb scans?
50
Automation Alternatives
• Various solutions exist, depending on company industry and
i trequirements.
• Customer self‐service maintenance solutions are a new trend and place validation and good faith requirements squarely on therequirements squarely on the customer’s shoulders.
E l ti f• E‐commerce solutions for Web stores refine the process of collection and validation of certificates.
51