2013-Issue 39—Companies that have installed “bolt-on” sales and use tax solutions with the goal of automating their transactional tax compliance function need to consider this question: Is the solution performing at the anticipated optimum level? While no system is perfect, if the pre-implementation process did not develop a sound strategy for combining the software functionality with both the operational business needs of the company and the needs (and wants) of the tax department , then the company could be dealing with a system that is not optimized as anticipated. A good process for automating the sales and use tax function begins during the architecture or design stage — develop and plan well, and you should end up with an optimally functioning system.
So what are some of the crucial steps that can assist you when managing the automation of a sales and use tax process that will actually end up being useful? Simply put, it is important to begin well and even more important to finish well — the pre-implementation and post-implementation steps of the software installation are more important than the installation of the software itself if you are looking to optimize the functionality of the software.
Beginning Well — Pre-Implementation
Initially, most of the tax department’s time and energy is focused on selecting the proper sales and use tax software package. Once that selection is made, most implementation teams will concentrate their efforts on how the product will be installed and on how to bridge the connection with the enterprise resource planning (ERP) package.
Many times, companies fail to evaluate whether or not they truly have a need for an external tax engine, or whether or not their current system even contains the proper tax drivers necessary to achieve precise results. Companies must be mindful that there is a direct relationship between the information fed to the tax software and the accuracy of the tax determination.
Unless you are performing a first-time install of a “bolt-on” tax engine, begin by analyzing the processes in place. Will those processes be relevant considering the direction and business requirements of the company? Is the company going through a new implementation or upgrade of an ERP package that will impact the tax department in an unanticipated manner? Are some of the procedures truly inefficient or redundant and therefore need to be completely revised (or eliminated)?
While it is critical to have a clear understanding of the current transactional tax processes, it is vitally important to recognize where improvements can be made to reduce inefficiencies and enhance production. Of course, the true motivation for embarking on such a project is to become more efficient, eliminate duplication of efforts, and reduce problematic or meaningless reports.
A great beginning starts with developing pre-implementation measures that intensely focus on the design of the system functionality by identifying the requirements necessary to optimize production. Transaction taxes have a tremendous impact on the overall supply chain, sourcing decisions, cash flow, and order-to-cash and procure-to-pay processes. As you know, no other function touches every single transaction in and out of the company in such a significant manner.
Something we witness time and time again: if the implementation team does not actively and regularly meet with the stakeholders — accounts receivable, procurement, accounts payable, asset management, etc. — to develop a solid plan for incorporating the company’s business needs along with the needs of the tax department, the result will be a disaster in the making.
The ability to arrive at the correct tax determination resides solely with the information (tax drivers) supplied by other business areas, the accuracy of which directly impacts tax compliance. Collaboration among the various departments is the driving force behind a successful project. The implementation team should schedule regular meetings to communicate the benefits realized by the company when the tax engine functions as expected. These meetings will also serve as a platform to discuss resolutions to issues that arise during the implementation phase.
The implementation team has to understand where the business is going from an accounting, procurement, and sales perspective. So many times, the individuals responsible for the input of tax-driving information say, “I don't know why we do it that way, we just do.” Education of personnel as to “why” the information they are responsible for is important and how that information affects the company’s tax compliance function is necessary to create synergies between the various departments. The business reasons have to be understood and melded with the way the automated solution is put in place. At times, you may find that the risk of tax exposure is outweighed by business processes. That is a decision that has to be made by the company as a whole.
Finishing Well — Post-Installation
Once the tax engine has been configured, testing must be done. Many levels of testing must be performed to ensure that the solution has been configured properly, that the tax engine is properly communicating with the ERP system, and that the taxes have been appropriately captured for compliance reporting.
The tax department and the implementation team must work together to develop testing scenarios that analyze the accuracy of the tax determination, the effect of a cancelled invoice or deleted line, the impact of freight, price variances, and other situations that occur in regular day-to-day operations. Ideally, the ERP environment should be stable and the tests should be generated using the same methods that will be in place after “go live.” For example, in testing a purchase order transaction, the test should begin with the requisitioner creating a PO; the transaction should be approved using all the normal approval processes. Once the tax department verifies that the expected result is achieved by the tax engine, and once accounting has verified that the transaction was properly accounted for, the tax department needs to confirm that the tax liability can be retrieved for compliance reporting.
Testing is complete, and you have survived “go live” — the end is near, but work still needs to be done. Once the implementation process is complete, there needs to be a period of monitoring and assessment of the functionality, i.e., How is the solution working? Who is using it well? Who is experiencing problems? Is additional training necessary? This needs to be done so that the investment is not wasted and the system is thoroughly effective. The implementation team will be tasked with resolving unexpected issues. These issues are typically associated with circumstances that could not be analyzed during the testing phase. This is also a good time to identify areas where enhancements can be made to improve the overall process.
The tax department should start refining its compliance process — taking a step back and analyzing the process to re-evaluate the necessity of existing tasks should be the first step of this analysis. Reconciliation methods should be finalized and procedures should be put in place to capture the differences between the general ledger and the taxes reported from the tax engine. Not only is the tax department responsible for preparing the sales and use tax returns, it should also establish a monthly process for reviewing material transactions for accuracy. This step is vital to maintaining a low level of exposure and for safeguarding against excessive overpayments to taxing jurisdictions. To truly benefit the organization, a transaction tax department must function as a creative “value-add” strategic advisory and planning organization, in addition to shouldering the reporting obligations.
Alvarez & Marsal Taxand Says:
Implementing or even upgrading a transactional tax automation solution that meets all your needs is the optimum goal. However, it takes a focused effort in the beginning of the project by a unified team to make this goal a reality. A tax technology team should adopt an approach that combines tax technical experience and in-depth knowledge of business systems and operations along with systems expertise to bridge the knowledge gap of system integrators, IT and tax departments. Proper planning and focused requirements-gathering in the beginning will certainly result in a tax solution that provides improved efficiencies and enhanced proficiency in a systematic process and, more importantly, mitigates the compliance risk of the company. Improved compliance productivity will allow tax department personnel to focus more time on planning and advisory roles, and to perform regular internal tax audits of material transactions, resulting in a positive contribution to the company.
Senior Director, Houston
+1 713 221 3931
Craig Beaty, Managing Director, contributed to this article.
For More Information
Managing Director, Houston
+1 713 221 3933
Managing Director, Miami
+1 305 704 6650
Managing Director, Seattle
+1 206 664 8911
Managing Director, Houston
+1 713 547 3690
As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.
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 US., 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 nearly 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.