Managing Sales Tax Data: Streamlining Internal Controls to Maximize Compliance Efficiency

Managing Sales Tax Data:

Streamlining Internal Controls

to Maximize Compliance Efficiency

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, FEBRUARY 20, 2014

Presenting a live 110-minute teleconference with interactive Q&A

Mike Dillon, President, Dillon Tax Consulting, Annapolis, Md. Kenneth Stites, Principal, Stites Tax Consulting, Austin, Texas

Tips for Optimal Quality

Sound Quality

If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory, you may listen via the phone: dial

1-866-873-1442 and enter your PIN when prompted. Otherwise, please

send us a chat or e-mail [email protected] immediately so we can address

the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

Continuing Education Credits

Attendees must listen throughout the program, including the Q & A session, in

order to qualify for full continuing education credits. Strafford is required to monitor attendance.

Record verification codes presented throughout the seminar. If you have not

printed out the “Official Record of Attendance,” please print it now (see

“Handouts” tab in “Conference Materials” box on left-hand side of your computer screen). To earn Continuing Education credits, you must write down the

verification codes in the corresponding spaces found on the Official Record of Attendance form.

Please refer to the instructions emailed to the registrant for additional information. If you have any questions, please contact Customer Service

at 1-800-926-7926 ext. 10.

Program Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the ^ symbol next to “Conference Materials” in the middle of the left-hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides and the Official Record of Attendance for today's program. • Double-click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

Managing Sales Tax Data: Streamlining

Internal Controls to Maximize

Compliance Efficiency

Michael T. Dillon, Dillon Tax Consulting

[email protected]

Feb. 20, 2014

Ken Stites, Stites Tax Consulting

Today’s Program

Sales Tax Data Requirements and Return Preparation [Kenneth Stites]

Internal Controls and Audit Defense [Michael T. Dillon]

Slide 8 – Slide 19

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR

RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction

described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be

Sales Tax Data Requirements

and Return Preparation

Kenneth Stites

Principal at

S

T

C

[email protected] (866) 705-6739

Data Requirements for

Sales and Use Tax Compliance

 Sales Transactions and Exemption Documentation

 Purchases of Fixed Assets

Sales Transactions

Required Data and Available Data

 Summary data for sales with breakdowns by

jurisdiction, taxable sales, exempt sales, tax invoiced

 Transactions with unique tax calculations

 Adjustments to sales amounts such as credit and

debit memos

 Journal entry detail for JE’s that affect recorded

sales or recorded sales tax accrual

Sales Transactions

Evaluating Systems that are in Place



Determine the systems that are collecting sales

data, whether it be a module in the accounting

software package or a separate billing software

package or some combination of systems

 Analyze system reports that are available and the

potential for report customization

 Consider data exports to spreadsheets to manage

data in an efficient manner

 Utilization of data stored by Sales Tax software

package

Sales Transactions

Access to and Maintenance of transaction detail



Copies of invoices retrievable by invoice number,

customer name and date

 Copies of credit memos that adjust sales amounts

with reference to the original sales documents

 Copies of contracts that provide definition of

products or services

 Journal entry back up for write offs that are

processed

Fixed Asset Purchases

Analyze or establish process to accrue and remit taxes on

assets when necessary



Determine the dollar cutoffs with respect to items

to be reviewed on an actual basis

 Establish the process to be implemented to review

fixed asset transactions for proper tax calculation

 Develop a methodology to capture the tax due,

accrue the tax on the books and report it on the sales

and use tax return

 Establish procedures for retaining detail for audit

support

Purchases of Expense Items

Establish a methodology for the review and reporting

of expense items

 Create and maintain a file of the invoices that

are included in the use tax accrual

 Develop a spreadsheet to accumulate data for

the use tax accrual that documents methodology

and assigns appropriate tax rates

 Incorporate use tax calculation into compliance

methodology

Tax Return Preparation

Utilize summary data via system reports and prepared

spreadsheets to prepare returns for filing.

Back end sales tax software can be used to generate

returns, possibly facilitating direct uploads to the tax

authorities.

Retain spreadsheets used to capture data from

outside of the billing system, which is included on the

tax returns.

Tax Return Preparation

Create file for filed tax returns including copies of

reports, spreadsheets, use tax back up, payment

processing and mailing certification whether it is

through the USPS or electronic.

Reconcile sales tax accrual account or accounts to the

returns filed, adjustments and amounts that need to

remain in the accrual.

Data Validation

Confirm that established methodologies, strategies

and processes are being followed.

Perform transaction tests to determine that tax is

calculated correctly, exempt transactions are excluded

from the tax calculations and that transactions are

properly recorded; also confirm that exemption

documentation is properly maintained.

Test the integrity of reports and spreadsheets used to

complete the sales and use tax returns , for

INTERNAL CONTROLS AND

AUDIT DEFENSE

Managing Sales Tax Data:

Internal Controls

 Training Staff in Data Management

• “Don’t know what we don’t know”

• Most companies lack tax process

• Most companies lack sales tax training

– So many variables that can affect tax decision or indecision – No internal review or placed in hands of non-tax personnel – Vendor incentive and A/P incentive

– Potential for overpayments as well as exposure

– Decentralized or complex sales and purchasing = more risk

Managing Sales Tax Data:

Internal Controls

 TRAINING STAFF IN DATA MANAGEMENT

• Understand the data they manage

• Communicate well with IT and IT systems

• Know how to get the data

• Know how to safeguard and validate the data

Managing Sales Tax Data:

Internal Controls

 Training Staff in Data Management

• Understand the data they manage

- Who, what, when, where, how

- Electronic processes – more detail is ideal

- Coding sales and purchase transactions to correct

jurisdiction, account, product and tax codes

- Tax matrix - Rating

Managing Sales Tax Data:

Internal Controls

 Training Staff in Data Management

• Understand the data they manage

- Ensuring transaction details match contract and

invoice literals

- Coding sales and use tax to proper accounts

- Prepare back-up documents to support returns – audit

trails

- Reconciling tax accounts to ensure what was collected

Managing Sales Tax Data:

Internal Controls

 TRAINING STAFF IN DATA MANAGEMENT

• Communicate well with IT and IT systems

- IT and data are critical to tax success - What information exists, in what format

- What information tax needs to prepare returns and

maintain an audit trail

- Establish points of command for communication

between tax and IT

- Future IT needs of tax

Managing Sales Tax Data:

Internal Controls

 TRAINING STAFF IN DATA MANAGEMENT

• Know how to get the data

- Who, what, when, where, how fields

- Which systems have tax calculation data - Which systems provide tax decision data - Send data to CRM, OE or invoicing

- Query reports required to prepare returns - Query reports required for audits

Managing Sales Tax Data:

Internal Controls

 TRAINING STAFF IN DATA MANAGEMENT

• Safeguarding and Validating the data

- Correct CRM / OE set-up

- Obtaining exemption and resale certificates - Maintain tax matrix and audit issue resolution - Detailed Reporting for audit purposes

- Departmental accountability for audit liabilities - Manual review / intervention in processes

 S A L E S A N D U S E TA X C O M P L I A N C E S O F T WA R E • A u t o m a t e d t a x d e c i s i o n , r a t i n g a n d r e t u r n p r e p a r a t i o n • Ke e p a c c o u n t i n g p e r s o n n e l f o c u s e d o n h i g h e r -v a l u e w o r k • D a t a a r c h i v e d f o r a u d i t p u r p o s e s 28

Managing Sales Tax Data:

Internal Controls

 S A L E S A N D U S E TA X C O M P L I A N C E S O F T WA R E : R E Q S • M u s t c o n s i d e r a n d e n s u r e s e a m l e s s i n t e g r a t i o n w i t h a c c o u n t i n g / b i l l i n g p l a t f o r m s • E v e n w i t h a u t o m a t i o n , t h e r e i s h u m a n i n v o l v e m e n t , w h i c h a l w a y s l e a d s t o t h e p o t e n t i a l f o r e r r o r.

– Minimize humans interaction but create reviews by tax for select accounts, problem vendors, big purchases over

materiality threshhold

29

Managing Sales Tax Data:

Internal Controls

 S A L E S A N D U S E TA X C O M P L I A N C E S O F T WA R E : R E Q S

• Systems must address who, what, when, where, hows

- More detailed descriptions reduce audit exposure

• Statutory exemptions must be addressed

• Exemption Certificate Management platforms

• Some purchases are exempt based on interstate commerce, and consideration must be given to multiple jurisdictions and when title is transferred.

30

Managing Sales Tax Data:

Internal Controls

 S A L E S A N D U S E TA X C O M P L I A N C E S O F T WA R E : W H AT S Y S T E M S A R E AVA I L A B L E

•

Avalara

•

Vertex

•

Taxware

•

BillSoft EZTax

•

TaxAutomation and leading integrators can assist

31

Managing Sales Tax Data:

Internal Controls

 Obtaining “Buy-In” from the C-level suite

• Audit results are key driver

• Compliance Process Review

- Sales tax expert audits multistate nexus and compliance and

provides a gap and exposure analysis

- Report provides a “road map” for resolving historical exposure

and enhancing prospective compliance processes

• Cost comparison - manual versus automated compliance

• Cost of integration

32

Managing Sales Tax Data:

Internal Controls

 Pre-audit process

• Audit Risk = risk of inaccurate records + risk of misapplication of the tax laws

• Review the audit information request to ensure:

- who, what, when, where, how – more detailed = better – The information requested is relevant and available, and

available in the format requested

– If not, be prepared to discuss with auditor before initial audit meeting and present alternatives

34

Managing Sales Tax Data:

Audit Defense

 P R E - A U D I T P R O C E S S

• Review the audit information request to ensure:

– Data fields not requested that will assist the audit process (e.g., project codes; electronic delivery field)

• Audit Thyself - Review the items to be audited

- System walk-through

- Missing Certificates and Invoices

- Do transaction detail, register and returns reconcile - Identify issues and prepare responses

35

Managing Sales Tax Data:

Audit Defense

 Audit process

• How are invoices and certs maintained – electronic v. manual

- Computer-assisted detail v. sampling – success depends on

quality of data and detailed descriptions

• Are there documents not requested that will assist the audit process

- contracts and exhibits / addenda / SOWs

- accounting behind bundled or mixed transactions • Consider system walk-through with auditor

36

Managing Sales Tax Data:

Audit Defense