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Exemption Certificate Management in Sales Tax Compliance

Sharpening Your Company's Approach to Verifying, Storing and Retrieving Certificates

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, MAY 12, 2011

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Steve Peck Northeast Regional Tax Manager Georgia-Pacific Corp. Atlanta Steve Peck, Northeast Regional Tax Manager, Georgia Pacific Corp., Atlanta Julian Chavez, Director, Transaction Tax, Ryan, San Francisco Silvia Aguirre, President, Tax Technology Services, Raleigh, N.C. Sandy Muszelik, Senior Tax Analyst, Linde North America, Murray Hill, N.J.

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E ti C tifi t M t i Exemption Certificate Management in Sales Tax Compliance Seminar

May 12, 2011 Silvia Aguirre, Tax Technology Services

saguirre@ ttsllc.com

Julian Chavez, Ryan

julian.chavez@ ryanco.com

Sandy Muszelik, Linde North America

sandy.muszelik@ linde.com

Steve Peck, Georgia-Pacific Corp.

smpeck@ gapac.com

5

Today’s Program

Experiences With Certificate Management At Georgia Pacific

[S t eve Peck]

Introduction To Key Concepts Slide 7 – Slide 11 Slide 12 – Slide 21

[Julian Chavez]

Procedures For Gathering, Validating Certificates On-Site

[Julian Chavez]

Alternatives For Storing Certificates, Retrieving When Needed Slide 22 – Slide 25 Slide 26 – Slide 37

[S ilvia Aguirre]

Working With Technology Already In Place

[S ilvia Aguirre]

Experiences With Certificate Management At Linde Slide 43 – Slide 47 Slide 38 – Slide 42 Experiences With Certificate Management At Linde

[S andy Muszelik]

6

EXPERIENCES WITH

Steve Peck, Georgia‐Pacific Corp.

CERTIFICATE MANAGEMENT AT GEORGIA PACIFIC AT GEORGIA‐PACIFIC

7

G i P ifi B k d Georgia‐Pacific: Background

• Georgia-Pacific LLC formerly a Fortune 500 company. Approx. $25B sales, ~100,000

g y p y pp $ , , customers

• Sells tissue, paper products, pulp, wastepaper, lumber and sheathing, chemicals,

etc.

• Approx. 200 domestic manufacturing facilities; significant presence world-wide
• Purchased by Koch effective y/e 2005; privately held, family of 40-plus LLCs
• Primarily selling wholesale for resale domestically, but with some retail customers
• Abide by the normal rule: Selling TPP is taxable unless customer for ship-to [or pick-

up] location can furnish a resale/mfg. exemption certificate

• Corporate Credit now centrally managing

d bl

• Discovered more customers are taxable
• Centralization has aided compliance, including ease in obtaining for audits
• More attention to specific state rules and requirements on certificates

8

G i P ifi EC E l i Georgia‐Pacific: EC Evolution

• Until recently, company had a decentralized environment. Each division

y, p y managed its own, with plants across the country responsible for obtaining and holding each of their customers’ EC.

• Not enough control points to reduce missing EC exposure to an

g p g p acceptable level

• Hard copy files/folders at various plants, even though sales is handled by

corporate p

• Adds/changes often overlooked, or state update requirements
• Decision was made that satisfactory control could only be obtained

through centralization at corporate [Atlanta HQ] through centralization at corporate [Atlanta HQ]

• Facilitated Tax Dept. to obtain ECs more readily for audit
• Aligned with corporate strategy toward procurement centralization

d f d bl f b ll

• Identified taxable customers for operations to bill tax
• Cross-customers (between entities) more readily noticed/handled

9

G i P ifi EC P Georgia‐Pacific: EC Process

Exemption certificate process Salespersons engage a new customer. Customer completes paperwork for credit application and ECs for all ship-to states. C dit li ti d EC t t C t C dit Credit application and EC sent to Corporate Credit

• Credit will pursue EC with business/salesperson, if credit application received

without any EC completed. Credit does a “sniff test” to make s re info is reasonable look for missing or incorrect Credit does a “sniff test” to make sure info is reasonable, look for missing or incorrect

• data. They then input into the credit management system (CMS).

Credit will also periodically runs sales reports by systems, to look for new customers, customer ship-tos that may have been overlooked (perhaps new LE). p y (p p ) One billing system interfaces directly with CMS for customer billing of tax info. Credit is contacted to provide ECs for sales and use tax audit purposes. Credit also has excellent leads on whom to contact, how to obtain sales reports. , p

10

G i P ifi EC P (C ) Georgia‐Pacific: EC Process (Cont.)

EC centralization benefits More/tighter controls with central/standard oversight At the ready for audit, with advance notice ready for auditor when that section of i review commences Cross-entity and state issues more readily recognized, tapping all the operations sales systems Visibility to taxability of customers and direction in billing compliance Billing of tax Visibility to taxability of customers and direction in billing compliance. Billing of tax was low priority before; more attention with Koch and “right under their nose” Proximity to resources involved with billing, since that is also centralized Participation/collaboration between Credit and Tax facilitated; sharing of knowledge p ; g g and resources [10th – 7th floor, same building] Key stakeholders also proximate

11

INTRODUCTION TO KEY

Julian Chavez, Ryan

INTRODUCTION TO KEY CONCEPTS

12

O i Overview

Exemption certificate management starts with having a good understanding of each state’s documentation requirements for understanding of each state s documentation requirements for supporting an exempt transaction. There are various types of exemption certificates that cover an array of transactions. Understanding what types of transactions are covered by an Understanding what types of transactions are covered by an exemption certificate and the period of time the certificate is valid are fundamental to managing this process. These d t di k t d i i ti tifi t understandings are key to designing an exemption certificate management system that will work with your company’s culture and accounting systems. Let’s briefly review the basics.

13

C T Of C ifi Common Types Of Certificates

• Resale certificates
• Manufacturing
• Manufacturing
• Research & development
• Pollution control/green construction
• Agricultural
• Not-for-profit (not all states exempt non-profit entities)

14

R l C ifi Resale Certificate

In many states, a purchase of tangible personal property for resale is not subject to sales or use tax, provided the sale is properly documented. A resale certificate is a signed document that supports the exempt nature of a transaction and indicates that the purchaser intends to resell the goods. It is a criminal offense to give a resale certificate to the seller for taxable items that the purchaser knows, at the time of purchase, h d f it th th f l l t l are purchased for its use rather than for resale, lease or rental. Depending on the amount of tax evaded, the offense may range from a misdemeanor to a felony.

15

R l C ifi (C ) Resale Certificates (Cont.)

Types of resale certificates

• Official state forms
• Indiana Louisiana Massachusetts Mississippi New
• Indiana, Louisiana, Massachusetts, Mississippi, New

York, Virginia, West Virginia and Wyoming are states that only accept their own official resale certificate forms.

• Multi-jurisdictional resale certificate
• General purpose resale certificate (office supply)
• General purpose resale certificate (office supply)
• Purchase order
• Direct pay

Direct pay

16

R l C ifi (C ) Resale Certificates (Cont.)

Elements of a resale/exemption certificate

 Name and address of seller  Name and address of purchaser  Name and address of purchaser  Description of purchaser’s business  Registration/exemption number of purchaser  Description of property purchased

• Blanket vs. specific

 Reason for exemption  Indemnification statement  Date of purchase and signature of purchaser  Good faith (SSTP states “good faith” is presumed)

Good faith (SSTP states good faith is presumed)

17

R l C ifi (C ) Resale Certificates (Cont.)

In most states, resale certificates are generally good until revoked in , g y g writing by the issuer. In some states, resale certificates are only good for a certain period of time.

St t E i ti P i d State Expiration Period Colorado 2 years - expiring at the end of odd-numbered years Connecticut Certificate should be renewed every 3 years Florida Annual renewal Illinois Certificate should be renewed every 3 years Illinois Certificate should be renewed every 3 years Maine Annual renewal Michigan Expires after 4 years Minnesota Certificate should be renewed every 3 years New Mexico Expires after 12 years North Dakota Certificate should be renewed every 2 years Oklahoma Expires after 3 years South Dakota Annual renewal West Virginia Annual renewal 18

State And Local Sales & Use Tax Audits

States are in dire need of revenue Audit activity has dramatically increased States are in dire need of revenue. Audit activity has dramatically increased. Auditors are examining resale certificates with “letter of the law” scrutiny. Lack of maintaining adequate support for exempt transactions is the No. 2 contributor to sales and use tax audit assessments. Reasons for assessment

• Exemption certificate not taken timely
• Incomplete certificates

Incomplete certificates

• Wrong form obtained. Taxpayer obtained copy of registration permit

rather than resale certificate.

• Customer is out of business and taxpayer is unable to provide exemption
• Customer is out of business, and taxpayer is unable to provide exemption

documentation. State and local sales and use tax rates have increased, a trend that has a dramatic impact on the size of sales and use tax assessments. impact on the size of sales and use tax assessments.

19

State And Local Sales & Use Tax Audits (Cont.)

Sampling can result in a skewed result against the taxpayer because of a few transactions with missing exemption certificates.

• Prior to the audit, you should assess the degree of

compliance in maintaining resale certificates and identify the periods of time compliance may have been weak This the periods of time compliance may have been weak. This is a great time to evaluate your system of controls around exemption certificates.

• Prior to the audit commencement, attempt to shore up

the lacking documentation.

20

Rising Demands For Exemption Certificates

The SEC has started to fine companies for failure to maintain a proper p p p system of controls for reporting and remitting sales and use tax. This new SEC trend will result in greater scrutiny by independent auditors

• f sales and use tax reserves in connection with contingent liabilities

g reportable under FAS 5 and ASC 450.

• Maintenance of exemption certificates may figure prominently in

reviews of adequacy of such sales and use tax reserves. q y Failure to maintain an exemption certificate management system of controls could result in a “reportable condition” or “significant deficiency,” under the Sect. 404 of the Sarbanes-Oxley Act. deficiency, under the Sect. 404 of the Sarbanes Oxley Act. Buyers of companies are starting to focus on exemption certificate maintenance when tax due diligence is being conducted.

• Could be a “deal-breaker”
• Could be a deal-breaker

21

PROCEDURES FOR

Julian Chavez, Ryan

PROCEDURES FOR GATHERING, VALIDATING CERTIFICATES ON‐SITE

22

R l Of A F l C P li Role Of A Formal Company Policy

The primary purpose of a company policy in connection with exemption certificates is to ensure that exempt sales are e e pt o ce t cates s to e su e t at e e pt sales a e documented and that customer is not incorrectly charged tax.

• A good company policy promotes employee behavior in

documenting exempt transactions and compels customers documenting exempt transactions and compels customers to furnish the appropriate exemption certificates. It protects the both company and its customers.

23

Tax Department Role: Exemption Certificates

The corporate tax department needs to take the lead in ensuring exempt The corporate tax department needs to take the lead in ensuring exempt transactions are properly documented, first by developing a formal company policy around exemption certificates and getting senior management’s buy-in. g y The corporate tax department should be integral in improving the exemption certificate management process by doing the following:

• Exemption certificate management system process assessment

Exemption certificate management system process assessment

• Redesign business process to fill gaps noted during process

assessment

• Determine if the process owners are the appropriate people or

departments; this will vary depending on type of business

• Explore technology or outsourcing alternatives

24

S ff T i i Staff Training

After the exemption certificate management process has been designed and the process owners have been identified, the next step will be training the process owners on the policy and procedures.

• Typical process owners
• Retailer: Store managers
• Distribution company: Credit Department

M f i A R i bl

• Manufacturing: Accounts Receivable
• The tax department will oversee and be a resource to these

process owners, to ensure full compliance. Annual meeting with process owners to discuss:

• Policy changes and compliance assessment

Customer issues

• Customer issues
• Audit issues

25

ALTERNATIVES FOR STORING

Silvia Aguirre, Tax Technology Services

CERTIFICATES, RETRIEVING WHEN NEEDED WHEN NEEDED

26

Storing And Retrieving Certificates g g

Common questions regarding storing and retrieving exemption certificates: Wh h ld t t?

• When should we start?
• Should we evaluate prior certificates or start fresh?
• Who is really responsible for setting policies, obtaining and

maintaining the certificates? maintaining the certificates?

• What ongoing procedures should be established?
• Should IT be involved? Can IT be involved?
• What is the need and speed of retrieving certificates?

What is the need and speed of retrieving certificates?

27

Storing And Retrieving Certificates (Cont.) g g ( )

Before storing and retrieving, take time to understand the terminology of your customer master structure; this will determine how you will store your certificates. For example: Payer: Usually a recurring name to keep track of several “bill- to” customers to customers Bill-To: Whom you will bill Ship-To: Where items will be shipped Job: Depending on your corporate structure you might have Job: Depending on your corporate structure, you might have several jobs in one ship-to location (i.e., contractor).

28

Storing And Retrieving Certificates (Cont.) g g ( )

Evaluating at what level should you store a certificate, based on your corporate structure. Bill-To M t ti i hi h t t tifi t

• Most common tier in which to store your certificate
• One certificate covers many ship-tos
• Type of business: Manufacturer, distributor

Ship To Ship-To

• Certificate covers only one ship-to location for a bill-to,

leaving the bill-to as taxable for other billing purposes. Job Job

• Certificate gets attached to a very specific location, job or

PO within a ship-to location, leaving the bill-to and other ship-tos not associated with a particular job to deal with p p j taxability independently.

29

Storing And Retrieving Certificates (Cont.) g g ( )

Approaches for storing and retrieving certificates T diti l

• Traditional
• Semi-automated
• Automated

30

Storing And Retrieving Certificates (Cont.) g g ( )

Traditional approach: Paper-based Pros

• Easy to implement

V ff d bl

• Very affordable

Cons

• Manually updating ERP and tax systems
• Manually updating ERP and tax systems
• Lots of duplication “MTC”
• Lack of visibility
• Not easy to remember when certificates need an update

Not easy to remember when certificates need an update

• Hard to respond to audits
• Easily lost

31

Storing And Retrieving Certificates (Cont.) g g ( )

Traditional approach: Paper-based (Cont.) Best way to store for quick retrieval: By state By name This approach is the least pro-active and most “rate-of-return” expensive. Described as “certificates are stored in a vacuum”

32

Storing And Retrieving Certificates (Cont.) g g ( )

Semi-automated: Spreadsheet- or image-based Pros I i t

• Inexpensive, easy to approve
• Easier to update
• More easily shared
• Can get creative with spreadsheet (i e

look up and pivot

• Can get creative with spreadsheet (i.e., look-up and pivot

tables, concatenation)

• More security; can be backed up

33

Storing And Retrieving Certificates (Cont.) g g ( )

Semi-automated: Spreadsheet- or image-based (Cont.) Cons Still i t ERP t t

• Still no mapping to ERP or tax system
• Hard to reconcile
• Manual maintenance
• Limited visibility
• Limited visibility
• Can be derailed if not maintained

34

Storing And Retrieving Certificates (Cont.) g g ( )

Semi-automated: Spreadsheet- or image-based (Cont.) Best way to store for quick retrieval: B t t By state By number and/or name By expiration date This approach is inexpensive and more secure, but lacks a quick retrieval response depending on how certificates are named retrieval response, depending on how certificates are named.

35

Storing And Retrieving Certificates (Cont.) g g ( )

Automated: All/some back-end integration Pros

• Easy to establish processes

E i t ti t ERP t t

• Easy integrations to ERP or tax systems
• Fast retrieval
• Good tool for coordinating with other departments
• Leverage internal database for internal use
• Leverage internal database for internal use

Cons

• Initial set-up can be substantial

Initial set up can be substantial

• A bit more expensive and might be hard to get approval
• May require IT resources to get customer information/reports

36

Storing And Retrieving Certificates (Cont.) g g ( )

Automated: All/some back-end integration (Cont.) Best way to store for quick retrieval: Because more searchable fields are stored, the retrieval process i ibl d di h is more accessible depending on search, This approach can provide the best ROI if having regular audits

• Quick respond to audit
• Control of audits

Control of audits

• Exposure  risk assessment possibilities

37

WORKING WITH

Silvia Aguirre, Tax Technology Services

TECHNOLOGY ALREADY IN PLACE PLACE

38

Technology For Exemption Certificates gy p

Available technology for managing exemption certificates

• Spreadsheets
• Image systems

B d

• Bar codes
• Software
• Licensed (in-house)
• SaaS
• SaaS
• Web portal (external vs. internal)
• E-commerce shopping carts
• APIs (automated programming interchange)

APIs (automated programming interchange)

• POS - retail

39

Challenges g

• Expected vs. actual tax codes
• Level of tax exemption: State/county/city/district
• Several ERP/tax systems
• Changing customer numbers

T bl d t t ti t

• Taxable and exempt transactions per customer
• POS

Two of my favorites

• Direct vs. indirect relationships (ERP challenge)
• Duplicate customers

Duplicate customers

40

Challenges: Direct Vs. Indirect g

Direct Pay Tax Code 12345 ABC0001 Taxability Info Tax Code ABC0001 GHT1110 T C d GHT1111 Taxability Info Direct Pay Tax Code Direct Pay Taxability Info Tax Code Manufacturer ABC0001 77745 Taxability Info ABC0001 GHT1110

This common scenario is the case where a bill‐to (ABC0001) has various ship‐tos and certificates , AND is also a ship‐to of another bill‐ to with certificates on file for that relationship. p

41

Challenges: Duplicate Customer g p

ABC0001 ABC Manufacturing Inc. ABC054 A.B.C. Manufacturing Inc. ABCM35 ABC Manufacturing ABCManu ABC Manu ABM1358 ABC Manu Inc. ABC Manufacturing Inc. ABM1358 ABC Manu Inc.

Reasons for duplicate recognition intelligence

• Same customer – Different customer number

Same customer Different customer number

• Same customer – Different name spelling
• Same customer – Different accounts for different POs

42

EXPERIENCES WITH

Sandy Muszelik, Linde North America.

CERTIFICATE MANAGEMENT AT LINDE AT LINDE

43

Corporate Overview Corporate Overview

• Numerous legal entity structure changes have taken place over the

years (mergers, acquisitions, divestitures, name changes, etc.).

• Two different ERP systems with completely different tax bolt-on

software configurations (both SAP with Vertex Q Series)

• Sell a variety of gases, related equipment/parts and services to an

extremely diverse customer base, making it difficult to confirm extremely diverse customer base, making it difficult to confirm applicable exemptions and obtain proper supporting documentation

• Example: Oxygen sold to a medical doctor under prescription for

human use vs sold to a veterinary hospital for animal use human use vs. sold to a veterinary hospital for animal use

44

Potential Issues

Some of the issues we find when gathering exemption documentation for Some of the issues we find when gathering exemption documentation for an audit

• Incomplete exemption certificate forms (e.g. missing signature,

description of items purchased etc ) description of items purchased, etc.)

• Customer provided incorrect documentation for the exemption

being claimed.

• Exemption certificate with incorrect selling or buying party name
• Outdated or expired exemption certificates

Requires numerous tax department man-hours to track down a new certificate after the fact, if the customer is even still in business and/or will respond to the request will respond to the request

45

S l ti P t I t l P Solution Part 1: Internal Process

C ti f t i i t i l il bl i t d t t i t t

• Creation of training materials available via tax department intranet

site ― Sales/use tax overview (i.e., what is it?) ( , ) ― Product taxability guidelines ― Statute of limitations information (e.g., sales tax credits for prior periods) ― Available exemptions in each state by SAP customer tax code Wh t d t ti i i d t t ti l ti ― What documentation is required to support a particular exemption (if any; e.g., exempt by statute) ― Frequently asked questions q y q

46

S l i P I l P (C ) Solution Part 1: Internal Process (Cont.)

• Link to API developed by third-party provider (CertCapture) is being

implemented, in conjunction with internal IT to facilitate process. ― Confirm if an exemption exists in a particular state (e g M&E Confirm if an exemption exists in a particular state (e.g., M&E taxable in California) and what is required to support it ― Drop-down by state and SAP customer tax code of applicable forms for each exemption ― Can open the form and require population of key information (e.g., customer name, seller name, product description, etc.) customer name, seller name, product description, etc.)

• Training sessions with customer care to review available materials and

address any concerns (ongoing)

47

Solution Part 2: CertCapture Solution Part 2: CertCapture

• Work with third-party provider (CertCapture) to:

― Efficiently download customer data from ERP systems ― Review historical customer exemption certificates on file against customer data, in order to identify missing or invalid/expired documents ― Conduct mass mailing to obtain new exemption certificates ― Validate and scan exemption certificates into centralized online database Create ongoing maintenance process wherein customer information is ― Create ongoing maintenance process wherein customer information is provided on a quarterly/other regular basis to ensure valid exemption certificates are on file

• Would include updating expiring certificates on file obtaining
• Would include updating expiring certificates on file, obtaining

certificates in new buy/seller names or in response to a legal entity structural change, etc.

• This will require building a business case to present to your management team to
• This will require building a business case to present to your management team to
• btain funding (e.g., using prior audit results, increased audit scrutiny, etc.)

48