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?
The folks at Avalara - makers of sales tax automation software - recently sat down with Christine Martin and Tim Teeter, subject matter experts in the area of sales tax in the supply chain, and asked them what the big deal is.
Okay so, what exactly is the “supply chain?”
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), ultimately into the hands of the end consumer. 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, mobile and POS technologies.
Today companies are continually redesigning long and complex supply chains to reduce resource and raw material costs and the associated carbon footprint generated by moving goods long distances.
Why is tax compliance so difficult? Is it procurement?
End to end supply chain tax compliance is difficult for a multitude of reasons.
First, 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 and varying sophistication of automated tax technologies, it is next to impossible to be 100% correct all of the time.
Second, nearly every state has its own unique tax compliance challenges ranging from complex nexus requirements to state and jurisdiction order sourcing rules to determine taxability of the product being sold. Add in constant jurisdiction boundary changes, tax rate changes, various tax exemptions, and a myriad of taxability rules and you have the perfect storm of complexity.
States don't award gold stars for accuracy - a business is 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. So every step along the supply chain involves either a manufacturing exemption or a sale for resale. Each company in the supply chain - all the way up to the retailer - has to both issue a certificate and collect one. That certificate has to be kept, on file, and accessible, if and when an auditor requests it.
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 just isn't there.
Tax compliance is really 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 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.
Are there things businesses can do to make it easier?
Use software and technology to automate tax compliance as much as possible which removes the possibility of human error in the process.
Want to learn more?
Check out our Sales Tax Automation page for info about integrated sales tax solutions for Sage ERP software. Or contact RKL eSolutions for a demo.