Accounts payable within large, distributed businesses can be a complex, disconnected process involving many different departments. Magnify this complexity with the numerous types of business assets and materials your employees are purchasing across the country from various suppliers for multiple locations and uses, and you have a recipe for sales and use tax determination audit risk. Not to mention significant operational and financial waste from researching correct rates, consolidating necessary data from various disparate ERP or payment systems, or overpaying – or even underpaying – the correct, required amount.
Accounts Payable Automation
Many companies are addressing their ERP deficiencies in this area by incorporating procure-to-pay, eProcurement, eInvoicing, and invoice and payables management solutions into their software portfolio stacks. As process improvements increase, momentum continues to build for broader applications of invoice management, including the ability to approve invoices in time to capture discounts, greater visibility into spending, and improved cash management. But while these solutions are reducing reliance on paper and improving operational efficiencies, these companies are still opening themselves up to significant penalties and audit risk without a dedicated tax determination engine to reconcile the supplier tax charges. You may have heard the term “garbage in, garbage out.”
Procure-to-Pay Sales and Use Tax Management
Let’s look at an example of where a typical account payables management solution may break down:
A purchase order is created in the ERP – it sends a call to the tax engine to look at the order and assess how much tax to expect to be charged. In this example, an order for $1,000 and the engine says there should be $60 in tax and the PO is approved for $1060.
The invoice for the PO comes in from the vendor and the tax amount charged by the vendor is entered into the ERP and then there is another call out to the tax engine. The tax engine looks at what the order is for, where it is coming from, where it is going, what it’s used for, the quantity and then returns a final calculation.
However, let’s say the vendor charged $80 and the engine says it should be $60 – the organization then has to decide how to handle it. If they have higher tolerances for variances they may allow the invoice to post so it can be paid. If they have low tolerances it may kick the invoice back to the AP clerk and then go back to the vendor for a correction and/or tax team for a consult. This results in more work, and delay in payment.
There are a lot of complexities on the AP side that make real-time payment difficult. For example, taxes are origin-based in Illinois. So if you have a vendor who is in Illinois and your business is in Illinois, you may think an order from that vendor is an intrastate transaction and subject to 8 percent tax – and that is likely what the engine will tell you. However, the Illinois-based vendor shipped the product out of a different warehouse in a different state and applied the correct 6.5 percent tax – but the system is flagging it and now it needs to be reviewed when actually the vendor was right. This is just one example of where the process may break down. There are thousands of potential scenarios that could come into play and cause a breakdown.
Sovos Use Tax Manager
Sovos Use Tax Manager is a cloud-based solution designed specifically to enable tax teams to have the visibility and control needed over tax data on every purchase. Reduce the risks and costs of tax over- and underpayments while managing the process in a fraction of the time. Tax teams are able to work in the background without IT intervention to easily import and aggregate purchase data from various systems and sources, enhancing the purchase information with all of the detail needed for correct sales and use tax determination and filing allocation.
- Import mapping tool for tax teams to easily connect multiple data sources and set invoice validation rules – no IT required
- Pre-built reports, including Total Use Tax Obligation, Use Tax Paid, Use Tax Accrued, Overcharges by Vendor, Tax Rate Variance by Vendor and more
- Analyze use tax and vendor-charged tax, compare tax paid or not paid on purchases to tax obligation calculated by Sovos tax engine, and calculate use tax (and do it in batch or real-time depending on your needs)
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