Facing a tax audit? Procurement records get targeted first, but tax technology can help

In our look at tax management technology, we’ve explored the tax pain points that businesses face in trying to manually manage tax transactions and avoid audits, and in a second article, we gave three tips to tell if your procurement organization is behind in the race to digitally upgrade its tax obligations.

To shed more light on the issues, we talked with Mike Bernard, Vertex’s Chief Tax Officer about what the tax engine provider is seeing during the coronavirus disruption and in the market overall.

He said companies must adjust to a changing tax landscape because legislatures and other taxing bodies couldn’t meet during the lockdown phase of the COVID-19 crisis, but now that they are meeting, he’s seeing increases in sales tax rates to help with the lost tax revenue from the disruption to business and tax collection. Bernard said the costs to the economy compare to crises like the dot.com bust and the housing crash.

Procurement teams will have to keep up with the tax changes because tax management adds value to a business and because procurement departments are at the forefront of risk when companies get audited, he said.

“The procurement space is the area where companies are actually purchasing goods. And the issue is, are they properly paying sales tax and use tax on that? Or are they properly claiming exemptions?” Bernard said.

“And I will tell you that for most mid-size to larger companies, procurement has been an issue for a long time, especially when there's not a tax engine within the procurement process that actually rates these things properly. So, what you end up with is one of the first places auditors come in is they audit your procurement area to figure out if you properly rated things.”

Q&A on tax technology

Spend Matters: Digitalization of business processes has departments like IT, finance and procurement collaborating. How should tax issues be incorporated into this digital transformation?

Mike Bernard: Digitization requires frictionless experience for customers, meaning fewer manual steps are required to get the needed correct invoice. Also, proper reporting, collecting and reporting of taxes must be part of the digital process — and should be automated as best as possible.

If businesses aren’t addressing tax issues internally as they upgrade their digital capabilities, what risks are they exposing themselves to?

Here’s a risk checklist. Everyone should consider these four issues:

  • Incorrect tax determination around sales and purchases
  • Poor customer experience around invoices (Automation is key to a frictionless sales and procurement experience.)
  • Cash flow and accounting issues (Companies need to set up contingencies or improper-collection remitting.)
  • Audit risk (Additional liabilities could be assessed if an audit doesn’t go your way.)

The tax landscape is constantly changing in different cities, states and countries. How has the coronavirus disruption to businesses highlighted problems or opportunities with taxes? Has it highlighted a strategic need for a tax policy across the business?

Just after the coronavirus lockdown began, I did a webinar for the Tax Executives Institute where about 600 tax professionals filled out my survey.

About 40% of those companies had a digital office and were able to work from home to do day-to-day tasks, respond to audit inquiries and stay on top of increasing business needs. Their billing and payments were electronic. Their electronic books and servers backed all that up. They didn't need paper.

Companies without a digital office couldn’t respond from home. Those 60% couldn’t work remotely too well. But I’ll tell you what — they are now in the process of accelerating that digital transformation.

Digital offices normally encompass a well-connected and centralized network of tax data and access to key business systems in the business groups. If you have manual processes that rely on paper or physically updating a lot of spreadsheets, then you’re at a disadvantage on many levels. Even email isn’t enough of a remote tool because it’s not done in a secure system that connects you to your different departments, suppliers or customers.

You have a legal background. And doing business in different states and different countries has a host of legal and compliance issues to follow local regulations. How is technology accounting for the legal implications of cross-border transactions and taxes?

Technology solutions must be designed and mapped to legal entities in order to produce proper reporting in tax geographies.

On tax policy, significant tax increases and additional tax verticals will be seriously considered and implemented in order to pay for COVID-19 costs, so corporate tax departments must be active to ensure they account for whatever legislative policies are implemented across all of the local, state, federal and international areas where their businesses operate.

How do tax discrepancies increase the likelihood of an audit? 

Most enterprise and large corporate taxpayers are subject to continuous audit by tax authorities. So taxpayers must be able to produce “audit ready” returns. Tax authorities will generally focus on the transaction tax space on exemptions, proper sourcing to a particular location, and the overall accuracy and rating of transactions.

Procurement can be a key player in all of this because they have visibility into spend, they work across departments and they collect the data for analysis.

That’s why auditors go to procurement first, but with the technology that procurement professionals rely on, they can provide detailed, up-to-date books. And that can make auditors happy. Audits tend to be triggered by discrepancies in how you’ve reported your financials before, so if you’re consistent and you have audit-ready returns because of your digital capabilities, then you’re better off.

If a business doesn’t have a tax department or in-house tax experts, how should they address the digitalization of tax transactions?

Companies will have to rely on trusted professional service providers who can assess their needs and provide technology solutions that are ready to go out of the box. The solution should work with as little customization as possible.

Do you have a favorite example of a client addressing their tax technology problems and them having that “a-ha” moment when the solution works for them?

The best example that comes to mind is a large, privately held American company that offers shipping and other business supplies.

They came to us a few years ago and said, “We need an automated exemption certificate management system, because we have about a hundred people managing certificates.”

So this is a situation where they would be selling office supplies to exempt organizations. It could be the federal government, could be the state government, could be school districts, Indian tribes, 501(c)(3) groups.

But if your business does hundreds of thousands of transactions, it’s a difficult task to judge whether any one of those many companies is exempt and then not charge them sales tax and properly keep records on all of that.

And what happened was we co-developed an exemption certificate system with them. We built a piece of technology that reduced the manual work for the customer, and we now sell and license the technology.

That business went from having to manage about 10,000 certificates a month to a negligible amount.

That fits with the trend toward collaboration, where vendors and they're clients or suppliers help each other out.

Historically, software and hardware development was top-down — it was from the manufacturers of the hardware for the chip makers, or software was driven from some pretty smart wonky people who understood software pretty well.

But, today, listening the customers and actually addressing their needs is the way development is going to go and how things will be developed for the future.

Co-development is something that we've embarked upon and embraced for several years now.

Spend Matters: That brings us to the last question — What's the future of tax technology?

Mike Bernard: Financial data is increasingly becoming unstructured, and discrete tax technology solutions are being developed around key reporting functions. And these technologies will continue to add value to corporate tax departments as regulatory changes accelerate and businesses expand and need scalability.

Any company doing a tech selection has to make sure that whatever products are sold to it, particularly in the applications business, that they're not a one-size-fits-all.

The company has got several tax needs. They've got to file income tax returns, sales tax, business license returns, telecom, property tax.

The thinking on technology used to be building a big data warehouse, and we're going to put all of that information in there. And then we're going to use one system to extract all of it, and then meet all your needs in this area, basically in the compliance area.

That's no longer the case.

What you see today is discrete technologies that are just built for discrete functions (sales tax, VAT, transfer pricing, country-by-country reporting, income tax). They are just really, really good at what they do. For example, Vertex is really good at sales tax.

And so, our technology, whether it's on-premise or in the cloud, works very well. And the tax content behind it and the granularity that we offer is very good. That's why our customers come to us.

Share on Procurious

Discuss this:

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.