2015-Issue 11—The U.S. economy is constantly fluctuating, which makes for an ever-changing landscape in corporate America. For many companies, uncertainty in the economy can result in an array of changes such as downsizing, mergers, acquisitions and expansions. Keeping up with corporate changes and their impact on business operations can be a daunting task for the corporate sales and use tax department, especially since most tax departments are in a constant state of maintaining compliance and reactively defending the compliance during audits from various taxing jurisdictions.
Corporate changes typically result in tax compliance obligations in new jurisdictions, attrition in the tax department, data migration issues and legacy system constraints — all of which indirectly impact the business operating units. Taking the time to ensure the sales tax team plays an integral part in changes in corporate plans can have a substantial impact on the company’s future by helping to mitigate potential future sales tax risk.
The last thing a business operating unit wants to see is an assessment of millions of dollars in sales and use taxes several years after a project is long complete. In most cases, this may be a result of the tax department being excluded from the project discussions, which can in turn have an adverse effect on accurate budgeting. Typically, most company operations and planning personnel will not appreciate the need for understanding and analyzing the granular level of sales and purchasing detail as well as the sales and use tax department. The sales tax department should be regularly included in the list of company personnel to consult about changes in business operations or new markets being explored. This will help to minimize the need for damage control with respect to unanticipated sales tax costs.
Sales Tax Department Empowerment
Based on the sales tax department’s experience with prior audits, they should have a clear vision for process improvements needed to prevent the past from repeating itself. The sales and use tax team typically has first-hand knowledge of sales and purchasing trends and can be of great value to the company if consulted prior to initiating major changes in business operations. Whether it’s allowing the tax department to review tax clauses in major purchase agreements or giving the tax department an opportunity to opine on potential sales transactions and/or capital spend activity, most companies forget or take for granted that they have an in-house tax consulting shop readily available to assist the business operations with enhancing their financial planning.
Allowing the tax department the opportunity to partner with other key business areas such as operations and sourcing can both increase the awareness of potential tax implications and further develop a fruitful synergy between internal groups. The sales tax team may be able to suggest strategic restructuring of contract language to reduce the tax liability, develop options for altering the delivery point to subject the transaction to a lower taxing jurisdiction, or negotiate when and where title transfers to minimize or defer the payment of sales tax. Contract or project-structuring changes can have a substantial impact on project budgeting. This level of cohesiveness in the company can pay future dividends by minimizing future tax exposure.
Perhaps the most beneficial aspect of empowering the sales tax department is the knowledge they will gain in understanding the nature of specific business operations within the company. In the world of sales tax, the only thing more important than knowing what items or services are being purchased or sold is knowing how the items or services are intended to be used. “Use” is one of the main drivers for taxability, and it requires a thorough understanding of the business operations to apply sales tax law correctly. Typically, a change in business operations will require the tax department to adjust its use tax accrual process, tweak any bolt-on tax decision software, and evaluate collection obligations that may arise when a company enters a new market and creates additional nexus in a taxing jurisdiction.
Changes in business operations can also create a number of data headaches for the tax department if they aren’t kept in the loop. Each month, the tax department is typically tasked with reviewing purchase and sales data, and utilizing the data to populate a monthly tax return. This should not be the time for the tax department to be surprised and/or discover a new profit center was created, find additional storage yards that were acquired and used for temporary staging of inventory, or learn that new material groups with substantial activity have magically appeared. Involving the tax department as soon as possible in business operations planning will help better prepare the tax department for the changes to expect with future tax compliance obligations.
Alvarez & Marsal Taxand Says:
It is important for a company to recognize the benefits of empowering the sales and use tax department when future plans for changes in business operations are being made. As we all know, every state has its own set of tax laws when it comes to transaction taxes. A company’s own in-house tax experts are the best resource to consult with business operations personnel about the potential tax impacts of business changes that can drive future tax savings.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
About Alvarez & Marsal Taxand
Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.
Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.