By Amiee Keenan, Avalara / Sage Sales Tax
You chose your ERP system to unify business processes and create visibility across operations. You likely chose modules that manage specific business functions such as accounts receivable, credit card payments, inventory, and distribution.
What you may not know is that audit risk often occurs in each of these business areas and, as a result, in each of the modules in your ERP system (subsequently, each of these modules correlates with a step in the supply chain). The supply chain is one of the trickiest areas to navigate in the world of sales tax compliance, often involving sales tax, use tax, exemption certificates, and headaches. Creating a tax-efficient procurement process is the best way to protect your business in this often high-risk audit environment. But where do you start?
Okay so, what exactly is the “supply chain?”
Supply chains are continually changing and operating within the scope of modern technology limits. In its simplest form, a supply chain is created to efficiently move raw materials and product from point A to point B (supplier to customer), and ultimately into the end consumer’s hands. The “suppliers” and “customers” encompass a series of raw materials vendors, manufacturers, wholesalers, distributors, resellers, retailers, and end consumers. Within this supply chain are different kinds of technologies to facilitate goods procurement and movement: strategic sourcing systems, ERP/order management systems, eCommerce systems, and mobile and POS technologies.
Today, companies are continually redesigning long and complex supply chains to reduce resource and raw materials costs and the associated carbon footprint generated by moving goods long distances. Companies need to understand from a more holistic point of view the impact of measurable costs (both tangible and intangible), customer service levels, and other associated costs with different supply chain network layouts.
Why is tax compliance so difficult? Is it procurement?
End-to-end supply chain tax compliance is difficult for a multitude of reasons.
Firstly, at the most basic level, there is no one single version of truth throughout the entire supply chain process for tax compliance. Every company in the supply chain process has their own understanding of what “tax compliance” really means for their products. With all of the different procurement, order entry, and eCommerce technologies used within the supply chain, as well as the varying sophistication of automated tax technologies, it is next to impossible to be 100% correct all of the time.
Secondly, nearly every state has its own version of truth surrounding tax compliance, ranging from nexus requirements, to state and jurisdiction product taxability rules, to state and jurisdiction order sourcing rules—all to determine the taxability of the product being sold. Add in constant jurisdiction boundary changes, state and jurisdiction tax rate changes, various tax exemptions, and a myriad of product taxability rules, and you have the perfect storm of complexity. No state is going to award a business a gold star for accuracy, they will only be notified (and potentially penalized) if tax compliance is done wrong.
What do you think the riskiest areas in the supply chain are for tax errors?
Probably the riskiest, and hardest part is the collection, maintenance, and management of exemption certificates. Keep in mind, sales tax in the United States is typically imposed on the consumer. Every step along the supply chain involves either a manufacturing exemption or a sale for resale. Each company in the supply chain before the retailer has to both issue a certificate and collect one. That certificate has to be kept on file and accessible, for the possibility that an auditor might request it. Someday.
Businesses who deal with this must be feeling a lot of pain. What are they doing to deal with the complexities?
The wrong answer is to throw human resources at the problem of state tax compliance. The ROI is just not evident. Tax compliance is a non-revenue generating activity for any organization—it is not an item you will see on a P&L statement. A solution that removes the human element from the entire tax-compliance process, and which automates the product movement touch points between companies in a supply chain is the growing trend. What most companies are turning to is the automation of exemption certificate management, and the integration of an exemption certificate solution into their billing system. By applying tax based on certificates being stored, the audit risk is drastically reduced.
Want to learn more?
Reduce audit risk and ensure compliance by reading this white paper on tax compliance issues in the supply chain.