Most enterprises already have one or several solutions for storing electronic data and documents. However, those systems might not meet compliance requirements for storing original electronic invoices and similar legally critical documents. Here is a brief guide to some of the prominent international requirements for acquiring a compliant e-archiving system. The full guide is available […]
3 Reasons Why Financial Institutions Struggle with Use Tax Management
It is the “other” tax, the one that doesn’t generally get the attention that income tax gets. But use tax can be full of nasty surprises for financial institutions (FIs) that don’t have it under control. With jurisdictions cracking down with audits, developing processes to handle use tax is becoming a significant concern for financial institutions—or it should be, anyway.
There is a surprisingly common question among FIs: “What happens if a vendor doesn’t collect sales tax?” In other words, the purchaser receives an invoice with no sales tax calculated or applied. In that situation, it is incumbent upon the purchaser to self-assess use tax on purchased items.
Reliance on accounts payable
In FIs, that task often falls to a finance, accounting or the accounts payable (AP) department and it can be a problem. Why? Largely because tax departments at FIs focus so closely on income tax, leaving AP without the tools and knowledge necessary to self-assess use tax in an accurate and timely fashion.
The result is under- and overpayments of use tax, both of which can become expensive. Overpayment is an obvious and unnecessary cost, but underpayment can lead to expensive, resource-sapping audits.
Three Challenges Financial Services Organizations Face with Use Tax
The unique problems FIs face with use tax fall into three essential categories:
As a FI expands geographically, it moves into more and more jurisdictions and has to deal with a dizzying number of rates, rules and forms, each of which is constantly subject to change. Worse, most FIs purchase from a variety of locations and through a variety of channels, making it almost impossible for them to get a single line of sight for their purchases and accurately calculate overpayment or underpayment.
Consider this common example: A financial institution is billed for software it uses in offices located in multiple states where sales tax is only applied to the FI’s IT headquarters rather than to all the offices where the software is used. In that situation, the FI, as purchaser, has to be sure to self-assess the use tax properly in all the locations where the software licenses will be used. Many FIs can’t do that because they either don’t know they need to do it or don’t have enough control over their use tax processes and systems to perform that level of assessment.
Geography puts pressure on FIs as an external force, but another major challenge financial institutions face is entirely internal. Many FIs use a variety of ERP or back-office systems, or a hybrid system, to assess and calculate accurate use tax.
FIs often implement systems based on departmental needs or tie them together from different sources after mergers or acquisitions. The problem is that in implementing many different systems, FIs create a spaghetti plate of data and functionality, with no single line of sight into their use tax.
Another significant challenge is having data feed into varying ERP systems through multiple different sources, including p-cards or digital marketplaces such as Ariba or Coupa that contain key transaction-related data. In any case, the lack of a single pane of glass for assessment and calculation of use tax creates a risk.
AP teams are burdened not only by tangled systems and geographic expansion but also by outdated manual process, often inherited or developed ad hoc. As such, AP team members have to understand what the company is purchasing, and how and where the company will use what it’s buying in order to process each invoice. Part of that process requires manually verifying tax rates, a slow and laborious process that increases risk and torpedoes efficiency.
Other struggles related to manual processes include assessing use tax for goods and services that many have unclear or varying tax rates, such as marketing expenses, giveaways, moving equipment from office to office and software subscriptions.
For example, if a FI purchases a television for a giveaway and the person who wins the giveaway will be using the TV in a different state requiring a different tax rate than the shipping address the TV was shipped to, the FI needs to assess use tax needs based on where the giveaway winner will ultimately use the TV.
Some AP departments either don’t review invoices or manually spot check them; both invite unnecessary risk of audits and overpayment.
Lack of visibility into invoices creates risk
In fact, many FIs have no idea how many invoices their AP teams process might contain use tax errors. A recent study by Sovos and Americas SAP User Group (ASUG) showed that 46 percent of organizations are not sure what percentage of their invoices have errors related to sales tax treatment. During a recent Sovos webcast for FIs, 80 percent of poll respondents said their institutions either spot check invoices (53 percent) or do not validate them at all (27 percent).
With audit risk increasing, lack of validation is no longer a safe option. In a recent Aberdeen Group study, 40 percent of respondents said audit frequency and scrutiny have increased over the last two years, and 58 percent said they expect audit risk to increase further over the next 3-5 years. Sovos webcast data shows half of respondents saying scrutiny has increased recently.
Of course, the flipside of the risk coin from audits is simple overpayment of use tax, a result of errors that can quickly become costly. Combined with the inefficiency of saddling AP departments with outdated systems and resource-consuming manual processes, the challenges of use tax management present FIs with a variety of potentially expensive and disastrous outcomes.
Gain control of use tax management
FIs have an option for managing use tax: automation with a system that gives AP the resources to meet the challenges of geography, system confusion and outdated processes.
Tackling use tax with a partner that tracks and automatically incorporates regulatory changes from various jurisdictions eliminates the burden of tracking and implementing compliance requirements based on geography. It also provides a single pane of glass for viewing invoices from multiple sources and eliminates manual treatment of invoices by automating processes, enabling AP to assess and calculate every invoice accurately.
With audit scrutiny increasing and use tax challenges no closer to solving themselves, consolidation under one system is the best option for financial institutions seeking to reduce risk, increase efficiency and avoid financial pitfalls.
Discover how Sovos Use Tax Manager protects organizations from audits and enables them to maximize efficiency.
The Supreme Court’s decision in South Dakota v Wayfair no longer limits states to the “physical presence” standard previously required to impose tax collection and remittance responsibility on a business. The new state nexus standards now look to criteria other than physical presence in evaluating a seller’s connection to that state. For example, South Dakota’s […]
It shouldn’t come as a surprise that the volume of returns received and processed by the IRS is down this filing season compared to last year. The question is why, and the answer likely has more to do with the government shutdown and new tax law than with filers missing deadlines. Although it is early […]
The rise of the so-called “gig economy” in the US has exploded in the last few years – last year, the Bureau of Labor & Statistics reported that 55 million people in the US are “gig workers” which represents about 35 percent of the US workforce — and it is supposed to rise to an […]
There is no doubt that the roll out of the Italian clearance e-invoicing mandate has kept the e-invoicing market and local taxpayers on their toes. Compliance with the mandate’s legal and technical requirements is not an easy task to fulfil. Consequently, taxpayers of different sectors of the economy, as well as different stakeholders of the […]