Managing Indirect Tax Compliance in Accounts Payable

Delaney McDonald
December 26, 2019

This blog was last updated on January 12, 2024

Tax compliance is not just an issue that accounts receivable (AR) handles. With regulatory changes becoming more and more complex, the responsibility also lies with accounts payable (AP) to minimize a company’s risk.

AP plays an important role in indirect tax compliance. States and the IRS continue to digitize efforts with tax collection and enforcement, and sales and use tax is often low-hanging fruit for auditors. With more room for potential errors, regulators will be looking increasingly at how much companies pay in sales tax.

The ruling in the Supreme Court case South Dakota v. Wayfair changed the standards for determining economic nexus. The question of physical presence has been replaced with the standard that states can collect sales tax from remote sellers with “substantial nexus” as long as it doesn’t create an “undue burden” to that remote seller. This makes it increasingly complicated for suppliers working with remote sellers to determine the correct taxation on purchased items. With new economic nexus standards, sellers need to determine whether they are complying with new mandates, while purchasers need to make sure sellers are determining correctly. 

Catching indirect tax discrepancies in the AP department

Trading partners must determine the right taxing jurisdictions and apply the right tax rate for every item in the supply chain. If a formal invoice has issues in the supplier’s systems, the best the buyer can do is catch the supplier’s determination errors in the AP approval process as early as possible.

If an error is found, the invoice with the incorrect rate and the associated data must then be returned. It should be returned with the suggested changes immediately upon receipt of that invoice into the AP approval workflow, rather than later when all business-related approvals have already happened—saving time and avoiding unnecessary business operations.

Having a solution in place that quickly catches and corrects any errors early in the workflow can save significant time, money and resources within the supply chain.

Automate indirect tax determination to mitigate AP risk 

With the continuing digitization of corporate procurement processes, an automated solution can catch errors that would otherwise be left uncorrected. With organizations often adapting new AP systems as needed, this multiplicity can also make the task of finding and fixing supplier errors exponentially more difficult. Unlike a centralized solution, multiple systems don’t always communicate with one another, creating an opportunity for mistakes. 

Buyers do not always trust their suppliers to know how to create invoices that are fully compliant in form and content. Indirect tax automation can reduce error rates that are associated with manual controls and keep up with the acceleration of business processes in AP automation. An automated solution mitigates issues by integrating legacy systems— a complex yet essential part of maintaining tax compliance and reducing risk.

Download the e-book, “Accounts Payable Tax Compliance: 5 Challenges SAP Shops Must Overcome,” and successfully manage supplier errors and AP system diversification.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Delaney McDonald

Share this post

CATNAT Regime
North America VAT & Fiscal Reporting
April 29, 2025
CATNAT Regime: Treatment of Natural Catastrophe Insurance in France

This blog was last updated on April 29, 2025 As some countries either introduce or consider introducing mandatory natural catastrophe insurance (e.g., Italy this year), France is ahead of the curve. This is because France already has a specific compensation scheme in place for coverage of property against natural disasters, and has had one since […]

Hungary tax penalty
EMEA North America VAT & Fiscal Reporting
April 15, 2025
Hungary: Tax Penalty Regime

This blog was last updated on April 15, 2025 Hungary’s tax penalty consequences of non-compliance with tax requirements are governed by the Act on Rules of Taxation. The law outlines a range of sanctions for non-compliance, including tax penalties, default penalties, late payment interest and self-revision fees. This blog will provide an overview of each […]