To cut business risk, tax problems need to be addressed in procurement’s digital transformation

Discussions about the digital transformation of business processes often go into great detail about things like the technology for matching invoices and purchase orders (PO’s) or how e-procurement catalogs can ensure on-contract buying and tame rogue spend — but the complexity of handling taxes is rarely addressed. And that’s a huge risk to businesses.

Sales tax. Use tax. Value-added tax.

A patchwork of tax laws, rules, regulations and exceptions exist across each U.S. state and country around the world. As transactions occur across state lines and international borders, all taxes must be accurately calculated, collected, reported, and remitted. Not doing so could lead to compliance and audit risks for organizations. This is where the importance of selecting the right technology comes into play.  It’s important that the tax technology platform chosen and implemented can integrate easily into your procurement system to accurately calculate the correct taxation on all transactions.

But who is responsible for getting the tax payments right on the thousands of sales happening every day for businesses?

Procurement departments know the processes and run the systems for procure-to-pay (P2P), which include the Amazon-like online shopping catalogs where sales happen. But they aren’t tax experts. IT departments are vital for integrating ERP systems with the P2P systems to increase the visibility into spend. But taxes aren’t their specialty. Even the finance department isn’t necessarily familiar with all the detailed tax requirements faced across a company. It’s up to the tax manager or director to ensure the financial data is accurate.

Tax specialists are needed to address the never-ending changes to laws and compliance issues that affect businesses’ bottom lines.

Not every business is mature enough to have a tax department that helps them work through the thorny issues, so third-party tax experts can help. But if businesses aren’t addressing these issues internally as they upgrade their digital capabilities, they’re exposing themselves to an array of problems.

What Tax Problems Do Businesses Face?

Overpaying or underpaying taxes can lead to real headaches, so it’s crucial for businesses to get their tax processes working properly. Getting refunds from local, state or federal agencies is often difficult and can be impossible in the case of value-added tax (VAT); trying to collect more tax after a transaction is difficult to do and can damage vendor or customer relationships.

All of this can also affect cash reserves. If a business doesn’t know how much money is on hand, it may not be able to respond to opportunities that arise. And in times of crisis, protecting cash flow is vital. Tax discrepancies or flawed processes can tie up cash reserves, causing even more issues.

Tax discrepancies can increase the likelihood of an audit, another negative outcome. In addition to scrutinizing books, auditors also can examine processes — so companies need to have confidence that their tax processes have been expertly set up and executed.

It pays to know the issues and avoid corporate risk.

That knowledge also includes understanding the various taxes that a business is obligated to collect and pay to various government agencies.

Indirect taxes and complicated compliance

The type of taxes that businesses face on each transaction are indirect taxes, as opposed to direct taxes like an individual’s income tax paid to the government. Millions of indirect tax payments are made on all the purchases that happen around the world when sales tax or VAT is collected. Most countries use VAT; whereas the United States is unique in imposing sales taxes. If sales tax isn’t charged, jurisdictions like states, counties or cities revert to a consumer use tax or seller’s use tax.

A consumer use tax is imposed on the use, storage or consumption of personal property in a state on which no sales tax has been paid because the out-of-state seller is not required to collect sales tax in the purchaser’s state. Use tax may also apply to purchased tax-exempt items that are subsequently used in a taxable manner. Furthermore, if a vendor charges a smaller tax amount then what a business’ home jurisdiction charges, the company is liable to its jurisdiction.

It’s a complicated tax landscape, for sure. The rules and regulations change frequently, vary by country and require different accounting treatment across countries, states and municipalities. And businesses have an obligation to account for the tax requirements of where the purchaser is or where the product is being shipped to.

As we explore digital transformation and the patchwork of tax problems, our next post will focus on ways to address the issues with automation and reduce risk, allowing businesses to operate with confidence.

This Brand Studio article was written with Vertex.

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