In my last blog, I discussed the first three challenges of native SAP tax compliance for growing companies facing multifaceted indirect tax requirements and continuous compliance mandates. These ranged from regional disparate ERP systems and custom workflows, shortsighted regulatory updates and ERP administration.
Additional challenges your IT, finance and tax teams face are discussed below.
Global Growth and Local Tax Challenges
With more companies focusing on global integration and trade, cross-border supply chains and expanding ecommerce, governments are utilizing more sophisticated technology and introducing new ways to enforce sales taxes, gross receipts taxes, excise taxes, shipping taxes and taxes on profits. The regulatory environment is digitally transforming around us, and it produces unique tax determination and reporting challenges in the U.S. and around the globe. These regulations disrupt operations and impede growth for businesses caught unprepared.
Financial Impact of VAT
Companies face new and varying VAT requirements at every turn. As manufacturers increasingly sell direct-to-consumer, countries expand their VAT requirements and governments worldwide employ sophisticated technology to keep pace with ecommerce and e-services. While some ERP systems handle VAT needs effectively at a basic level, their ability to keep pace with evolving rules in different jurisdictions is a major shortcoming, leaving companies with a patchwork of local providers, solutions and inefficient business processes.
VAT, if it is not managed properly, poses a major risk to a company’s bottom line and reputation. Often viewed as an unwelcome administrative task, businesses fail to realize just how much VAT the company is generating and the financial ramifications for errors in VAT filings. On average, at-risk VAT totals about 20 percent of sales and purchases within an organization, meaning multinationals manage billions of dollars of VAT daily.
Navigating Sales and Use Tax Requirements
There are 45 states in the U.S., including the District of Columbia, that have unique tax laws and reporting requirements. Identifying and applying the correct sales and use tax for each state or jurisdiction can lead to what some tax managers have described as, “death by a thousand paper cuts.” This can culminate in hefty fees and penalties for businesses if the rates and rules are not constantly tracked, updated and managed.
eCommerce tax collection in the United States has recently become more challenging, as the Supreme Court decided in favor of South Dakota in South Dakota v. Wayfair, giving states the freedom to amend their rules to impose sales tax based on “economic presence” or nexus. Remote seller legislation and state nexus threshold rules are being adopted by more states monthly to address remote sales, and businesses should pay close attention to any states moving to tax remote commerce where they have more than $100,000 worth of sales or more than 200 transactions to avoid potential fines.
Side note: On the last day of October, the state of South Dakota settled with online sellers, Wayfair, Overstock and Newegg. The settlement removed the injunction that prevented South Dakota from requiring the companies to comply with the remote seller law. Each will have to comply beginning January 1, 2019.
Companies still relying on native SAP tax compliance, manual processes, spreadsheets, and disparate instances of SAP ECC or S/4HANA and other tax data-related technologies may be ill-prepared to scale up the number of jurisdictions in which they are required to register, collect and remit sales tax accurately within the requisite timelines. Additionally, tax teams must be ready to extract and provide transactional data to regulators across the country. I’ve already addressed the use tax and procurement challenges the Wayfair ruling causes on the accounts payable side of the business that must now scrutinize a larger number of vendor invoices for correct sales and use tax determination.
In my final post, I’ll discuss the rise of real-time transaction controls, the global e-invoicing clearance model trend and the effect on cloud-native purchasing applications.
Read Part I, here.
Read the last installment, part 3, here.
Learn how to minimize business disruption during an SAP S/4HANA upgrade project in the wake of modern tax: Read Preparing SAP S/4HANA for Continuous Tax Compliance and don’t let the requirements of modern tax derail your company.