1. Introduction To Procurement Cards and Sales Tax Gregory L. Anderson

2. 1 The Sales Tax Issue Documenting sales tax paid –If a purchaser cannot document the payment of sales tax or the accrual of the use tax will be assessed in an audit. Identifying transactions where tax was not charged –If tax was not charged by the vendor, the purchaser is obligated to accrue the use tax Identifying exempt purchases Calculating use tax accrual Preparing for audit

3. 2 Sales Tax Basics As consumers we pay the tax that appears on the invoice Corporate perspective is very different Use tax is a significant audit issue Process evolved from manual to automated Currently every state imposes a sales tax except: –Alaska –Delaware –Montana –New Hampshire –Oregon In states with a sales tax, sales tax revenue generally comprises more than half of the state’s revenue

4. 3 Sales Tax – Imposition What is a sales tax? –Defined differently in every jurisdiction –Generally the definition of sales tax will include: The sale, lease, rental, barter or exchange of tangible personal property and enumerated services. The sale of tangible personal property will be taxable unless specifically exempt. For example: –Machinery/equipment used in manufacturing, –Inventory –Raw materials Services taxable only as enumerated

5. 4 Use Tax What Is a Use Tax? –A tax paid by the purchaser when taxable property or services are used in the state and a state tax has not been paid. Example – ABC Company located in Minnesota buys a printer from XYZ Company in Iowa. XYZ Company does not charge sales tax. ABC Company would pay or accrue use tax to the state of Minnesota.

6. 5 Direct Pay Direct Pay Permits –An exemption certificate issued by the state to a purchaser allowing the permit holder to buy taxable items without paying sales tax. –Permit holder is responsible for determining which purchases are taxable and which are exempt. –Permit holder remits use tax to the state on taxable purchases.

7. 6 Who Charges Sales Tax – Seller’s Perspective Vendor Nexus –Think of it as jurisdiction - limited by Commerce Clause and Due Process –Legal term that describes the concept of a link or connection between a merchant and a taxing jurisdiction (state). –A benchmark that determines whether a vendor can be required to collect the sales tax. –If a merchant does not have nexus in the destination state, merchant is not required to collect the tax. Examples: –Internet –Catalog –Out-state transactions

8. 7 Issue Focus A corporate purchaser must be able to demonstrate to the taxing authority that sales tax has been paid. If sales tax has not been paid and the item purchased is not exempt from tax, the purchaser must demonstrate that the use tax has been accrued and remitted to the taxing authority

9. 8 Compliance Options Existing use tax accrual approach –Estimation –Sampling Block Stratified/random Integration with tax software applications Purchasing Card Tax Model

10. 9 Planning For Tax Compliance Need to work with the Tax Department: –Reasons P-card volume is growing Transaction size is increasing Range of eligible items is expanding –Benefits Synergy with existing compliance process Adaptable tools Margin of error

11. 10 Establishing Scope Dollar volume of purchases Number of states where the program operates Local tax jurisdictions Transaction data available –Level I, Level II, Level III Cardholder characteristics Access to on-line statements Tax knowledge Individual vs. centralized purchases (shared services)

12. 11 Establishing Scope Program purchasing mechanism Types of purchases E-commerce penetration –May provide additional data Centralization of product sourcing –Limits scope of vendor analysis

13. 12 Decision Making Documentation procedures –Required documents –Assuring compliance –Archive and retention procedures Cardholder involvement Available data Available tools Centralized vs. decentralized

14. 13 Decision Making Investing in people –Available hours –Tax or P-card management Accuracy required Cost / benefit

15. 14 Tax Solution Best Practice Characteristics Automated solutions provide more dependable results (not a new issue in tax) Solutions focused on Level I data address full scope of program Limit cardholder tasks related to tax Leverage existing resources Documented process aids in audit management

16. 15 Tax Model - Example Visa Best-Practice Tax Model (Plan Accuracy) High Low Account Code Analysis MCC Analysis Vendor Review Tax Department Review – Site Specific Criteria State Address Analysis and Level II Simple Difficult (Plan Complexity)

17. 16 Tax Model Operates by eliminating transactions where tax has been charged The Tax Model practices are optional. They can be used separately or in combination depending upon the and characteristics of the program –Number of cards issued –Transaction and card limits –Types of purchases Model refined to acceptable level of accuracy

18. 17 Documenting Sales Tax Receipts –Vendor –Transaction amount –Ship-to –Ship-from (local tax) –Item description –Tax amount Compliance with procedures Electronic receipts acceptable

19. 18 Sales Tax Audits Audits –Traditional – The state taxing authority will perform the entire audit function from data collection and review to the final assessment Isolate P-card Program Statistical sample of GL Success Factors - Documented Process - Consistent Application - Appropriate Documentation

20. 19 Questions / Wrap-up Client questions: Documentation requirements Cardholder involvement Audits Receipt retention Internet Tax Freedom Act Visa Resources are available to assist with tax questions: “Sales and Use Taxes – An Introduction to the Basics for Card Program Administration”

21. Introduction To Procurement Cards and Sales Tax Gregory L. Anderson