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Procurement Cards and Sales Tax Compliance Procurement Cards and Sales Tax Compliance

Planning and Executing a Program to Master the Complexities

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURSDAY, JULY 7, 2011

Today’s faculty features:

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

Greg Anderson Partner Application Design Resource LLP Dallas Greg Anderson, Partner, Application Design Resource LLP, Dallas Alexandra Sampson, Reed Smith, Washington, D.C. Curt Regensberger, Revenue Audit Supervisor, Illinois Department of Revenue, Fairview Heights, Ill. Deborah Hoff, Field Manager, Texas Office of the Comptroller, Houston

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P t C d d S l T Procurement Cards and Sales Tax Compliance Seminar

July 7, 2011 Greg Anderson, Application Design Resource LLP

greg.anderson@ pcardtax.com

Alexandra Sampson, Reed Smith

asampson@ reedsmith.com

Deborah Hoff, Texas Office of the Comptroller

deborah.hoff@ cpa.state.tx.us

Curt Regensberger, Illinois Department of Revenue

curt.regensberger@ illinois.gov

Today’s Program

State Handling Of P-Card Transactions: Examples Slide 7 – Slide 8 g p

[Alexandra S ampson]

Compliance Options

[Greg Anderson]

Slide 9 – Slide 15

[G eg de so ]

Working With Issuers

[Greg Anderson]

Slide 16 – Slide 22 Recordkeeping Priorities

[Alexandra S ampson]

Illinois Treatment Of P-Card Transactions Slide 23 – Slide 24 Slide 25 – Slide 33 Texas Treatment Of P-Card Transactions

[Deborah Hoff]

Illinois Treatment Of P Card Transactions

[Curt Regensberger]

Slide 25 Slide 33 Slide 34 – Slide 41 Best Practices For Companies Using P-Cards

[Greg Anderson and Alexandra S ampson]

Slide 42 – Slide 50

STATE HANDLING OF P CARD

Alexandra Sampson, Reed Smith

STATE HANDLING OF P‐CARD TRANSACTIONS: EXAMPLES

Examples Of State Procurement Card Policies

Recordkeeping requirements and audit methodology vary by state

• Recordkeeping requirements and audit methodology vary by state
• States vary with respect to:

― The types of documentiaon required ― The length of time that records must be retained ― The audit methodology used and the availability of managed audits ― The allowance of direct pay permits The allowance of direct pay permits

• Many states do not have procurement card specific rules
• State-specific examples

― New York ― Florida ― South Carolina ― Virginia

8

COMPLIANCE OPTIONS

Greg Anderson, Application Design Resource LLP

COMPLIANCE OPTIONS

Most Common Compliance Approaches

• No accrual process may be a valid approach
• Manual transaction review
• Manual transaction review
• Level II/Level III reliance
• Estimation

Estimation

• Tax modeling
• Spreadsheet-based
• Third-party software

10

M l T i R i Manual Transaction Review

• Manual review of cardholder submitted receipts
• Manual review of cardholder submitted receipts
• National Association of Purchasing Card Professionals (NAPCP)
• 60% of programs performed a manual transaction review.

60% of programs performed a manual transaction review.

• 56% noted that limited staff resources were a significant

roadblock to developing an accrual process.

• Time consuming
• Tasks are repetitive
• Limited opportunities to increase efficiency
• Accuracy directly related to competence of reviewer/quality
• f documentation
• f documentation
• Difficult to establish a cost/benefit

11

L l II/L l III R li Level II/Level III Reliance

• In this approach, use tax is accrued on all transactions for which a

tax amount is not passed with the transaction data.

• The approach may be modified to also exclude ”in-state”

transactions, if location data of the purchaser and merchant are available.

• Limited Level II and Level III data reported on transactions
• NAPCP survey showed majority of respondents saw Level II or
• NAPCP survey showed majority of respondents saw Level II or

Level III data on <25% of transactions

• Much lower than issuer analysis of Level II capable vendors
• Requires less time than other approaches
• Still difficult to establish beneficial cost/benefit, since approach

results in overpayments esults

• ve pay

e ts

12

E i i Estimation

• In this approach a detailed review is performed of each transaction during

In this approach, a detailed review is performed of each transaction during the sample period. Based on the results of the sample review, an accrual is

• determined. The accrual calculated on the sample, is converted to a factor

(generally expressed as a percentage, period accrual/total sample) and is j d i f i projected against future transactions.

• Based on the NAPCP user survey, 15% of respondents use some form (block or

statistical) of sampling.

• Since the estimate is calculated to slightly overestimate the accrual, it

generally results in the overpayment of use tax.

• Overpayments may also result if the estimate is not updated periodically, as

d b i t ll t t i j i di ti more vendors begin to collect tax in more jurisdictions.

• May not be effective if program is expanding into new operations, locations
• Time required to create the estimation factor in each jurisdiction, combined

with risk of overpayments, may present a challenge to establishing a positive cost benefit.

13

T M d li Tax Modeling

• Tax modeling combines data passed with the transaction, data appended to

the transaction from the issuer database, and basic sales/use tax principles to identify reasons to exclude a transaction from the use tax accrual.

• Can be performed using manual manipulation of data in a spreadsheet

application, or third-party software can be used

• Based on the NAPCP user survey, 23% of the respondents used some form of

this approach.

• Depending on how the process is managed, this has the potential to be the

most cost effective approach. It reduces cardholder and administrator time to execute monthly accrual, develops and retains tax intelligence, and is easily updated for program changes and additions updated for program changes and additions.

• Provides effective audit documentation and workpapers in support of the use

tax accrual

• Generally most cost effective approach since time required to execute a
• Generally most cost effective approach, since time required to execute a

spreadsheet approach is limited, and cost of software is minimal.

14

T M d li E l Tax Modeling: Example

• Tax modeling begins with an assumption that all transactions

Tax modeling begins with an assumption that all transactions are suspect, and establishes criteria that exclude a transaction from the use tax accrual. E l i it i i ht i l d

• Exclusion criteria might include:
• Sales tax data passed by the merchant
• In state transactions
• In-state transactions
• MCC codes assigned to the merchant
• Specific merchants based on nexus profile

Specific merchants based on nexus profile

• GL/cost center code assigned to the transaction
• Specific cardholders

The NAPCP study is available at www.napcp.org

15

WORKING WITH ISSUERS

Greg Anderson, Application Design Resource LLP

W ki Wi h I Working With Issuers

• Issuer selection
• Implementation
• Ongoing issuer relationship – Tools and support
• Data management

17

Working With Issuers: Issuer Selection

• RFP input
• Identify tools/applications/software that identify transactions where

sales tax has not been collected by the merchant, and calculate the use tax accrual where required

• Describe reporting capabilities that support the management of sales

and use tax

• Does the reconciliation tool allow caradholders to enter a tax amount or

select a checkbox, and can cardholders identify the destination of the items purchased?

• RFP evaluation
• Tax participation is important to assess value of issuer tax capabilities.
• Candidate interviews
• Follow-up questions from RFP responses and a demonstration of the

Follow up questions from RFP responses and a demonstration of the tools provided by the potential issuer

18

Working With Issuers: Implementation

• Implementation work group
• Tax functions should be specifically identified and included in

the issuer’s implementation budget.

• Tax participation ensures that resources identified in RFP are
• Tax participation ensures that resources identified in RFP are

delivered.

• If a ”pilot” program is the first step in implementation, then full

tax management functionality should not be delayed until full tax management functionality should not be delayed until full program roll-out.

• During testing of a transaction management interface, tax staff

h ld b i l i l d l i h l li i d should be actively involved evaluating the tools, applications and reports that are generated.

• The issuer is responsible for delivering tools, applications and

reports that meet or exceed the requirements specified in the RFP .

19

Working With Issuers: Tools And Support

T l

• Tools
• Issuer-provided transaction management application
• Work with issuer to identify features that support tax

y pp management

• Request documentation that describes function

E l t ith t t d t

• Evaluate with test data
• Is reporting adequate to support compliance and audit?
• Support

pp

• How are tools and reports supported and updated?
• How is the issuer working to increase Level II and Level III data?
• How can issuer support tax management function during audit?

20

Working With Issuers: Data Management

• The majority of transactions will display Level I data only.

j y p y y

• Issuers capable of passing Level II and III do not necessarily

collect sales tax. Additi l d t i il bl f i d t b

• Additional data is available from issuer databases.
• Merchant data
• Location
• Merchant category code (MCC) or SIC code
• Cardholder data
• Location
• Destination of purchased items
• GL/Cost center assigned to the transaction
• GL/Cost center assigned to the transaction

21

Working With Issuers: Data Management (Cont.)

• Generally standard reports do not provide the key transaction data
• Generally, standard reports do not provide the key transaction data

required for tax decisionmaking.

• Working with the issuer, reports can be designed that efficiently

deliver the data that increase effectiveness of tax management deliver the data that increase effectiveness of tax management.

• A sample report might include:
• Cardholder name – Facilitates finding receipts selected during

audit

• Cardholder location – Generally establishes situs of tax liability
• Destination ZIP If a location other than the cardholder
• Destination ZIP – If a location other than the cardholder
• Merchant name – Nature of purchase
• Merchant location – In-state/out-of-state

22

RECORDKEEPING PRIORITIES

Alexandra Sampson, Reed Smith

R dk i P i i i Recordkeeping Priorities

• Four leading source records to keep on hand at headquarters

― 1) Receipts (paper, electronic, imaged and enhanced data) ― 2) Invoices and vendor reports 3) Card issuer reports ― 3) Card issuer reports ― 4) Internal reports (e.g., P-card transactions segregated from

• ther A/P transactions)
• Implications of failing to keep adequate records

― Penalties Interest ― Interest ― Revocation of Certificate of Authority ― Other

24

ILLINOIS TREATMENT OF P‐

Curt Regensberger, Illinois Department of Revenue

CARD TRANSACTIONS

Illinois Laws And Regulations Illinois Laws And Regulations

• The state has no specific rules concerning P‐cards

The state has no specific rules concerning P cards

26

Initial Interview Initial Interview

• Does your company utilize corporate procurement cards or corporate
• Does your company utilize corporate procurement cards or corporate

purchasing cards? If yes:

• What areas/di isions of the compan

tili e these cards?

• What areas/divisions of the company utilize these cards?
• What is the maximum dollar amount for a purchase in each area/division?
• Is there a dollar limit for purchases in a month by individuals or

area/divisions?

27

Initial Interview (Cont.) Initial Interview (Cont.)

• What types of goods and/or services can be purchased using the cards?
• Is there a restriction as to which vendors may be utilized when using the

cards?

• What types of documentation do you maintain in relation to these

purchases? purchases?

• Is there an individual transaction back‐up (invoice) maintained by the

individuals making purchases or is the back up sent to a central location? individuals making purchases, or is the back‐up sent to a central location?

28

Initial Interview (Cont.) Initial Interview (Cont.)

• Is there a way to identify these transactions in your company’s computer
• r hard‐copy files?

py

• Do you have a standardized tax practice for these transactions, such as an

assumption that all out‐of‐state vendors did not charge tax and all in‐state assumption that all out of state vendors did not charge tax and all in state vendors charged tax? Thus, all out‐of‐state purchases would need to have use tax self‐assessed.

29

Before The Examination Before The Examination

• Examine a taxpayer’s written operational procedures for procurement

card transactions and internal controls used

• Test, validate and evaluate taxpayer systems for verifying or estimating

appropriate tax accruals on procurement card transactions appropriate tax accruals on procurement card transactions

30

Sampling Sampling

• Use computer‐assisted audit techniques if a transaction or summary

information is available in electronic form, and if the procurement card transactions can be identified.

• Segregate procurement card transactions from other purchases for

analysis purposes, if possible. y p p , p

• Block‐sample a current month, for ease of invoice retrieval.

31

Examination Examination

• We will be expecting the same level of detail that is contained in a

traditional paper invoice.

• Out of fairness, we will consider other information in making audit

decisions.

• We will always protect the revenues of the state, if there is a doubt on the

taxability of a transaction.

32

What Can Taxpayers Do? What Can Taxpayers Do?

• Have some indicator in their records as to P‐card transactions
• At the minimum, keep the credit card statement at the company’s

headquarters

• Persuade the issuer to provide the vendor and state, on statement

33

TEXAS TREATMENT OF P‐

Deborah Hoff, Texas Office of the Comptroller

CARD TRANSACTIONS

R i Of P C d Review Of P‐Cards

• Sampling

— Manual — Computer audit menu system (CAMS)

• Population division

All th t t t f th P d i

• All the statements for the P-card companies as one group
• P-cards divided into a population, based on posting to the

accounts of interest

• P-cards reviewed as a component of the accounts of interest

35

U D i A di D i Use Determines Audit Design

• Contractor

— Complex taxability — Type of use — Infrequent purchases

• Advertising company

— Less complex taxability — Type of use R d — Repeat vendors

36

Use Determines Audit Design (Cont.)

• Service company in the petrochemical industry

— Complex taxability Complex taxability — Type of use — High volume of transactions — Accounting experts

• Should these transactions be separated from the expense

population? Normal b siness acti it — Normal business activity

37

S i D i Supporting Documentation

• Monthly credit card statement
• Invoices

Invoices — Tax charged and proof of payment — Can be traced to records proving tax was accrued and paid to the state — A statement that sales or use tax was included — A description proving that the item is clearly not taxable

• Sufficient alternative evidence that proves tax compliance

Rare for P cards — Rare for P-cards

38

Mi i I i Missing Invoices

State Tax Automated Research (STAR) System accession number State Tax Automated Research (STAR) System accession number 9801097L ”Just as with traditional paper invoices, if an item description is

• mitted and cannot be ascertained by the auditor, the burden
• f proof will fall on the purchaser and/or vendor to show that

p p the item is not taxable.”

39

H T P F A A di ? How To Prepare For An Audit? B tt li BE PREPARED Bottom line: BE PREPARED

Provide complete, verifable data

40

F M I f i For More Information

• I. Texas Comptroller of Public Accounts Web site

II htt // i d t t t /

• II. http://www.window.state.tx.us/

III.STAR system for Texas taxibility research IV htt // t 2 t t t / IV.http://cpastar2.cpa.state.tx.us/

41

Greg Anderson, Application Design Resource LLP

BEST PRACTICES FOR

Greg Anderson, Application Design Resource LLP Alexandra Sampson, Reed Smith

COMPANIES USING P‐CARDS

Best Practice Characteristics

Compliant

• Compliant
• Meets state requirements for determining use tax accrual
• Process is auditable
• Consistent
• Business rules and taxability criteria are similarly executed from period

to period

• Accurate
• Identifies transactions requiring a use tax accrual with reasonable

accuracy

• Calculates correct tax for destination of items purchased
• Cost Effective
• Time required to manage the process adds value to the accrual process
• Time required to manage the process adds value to the accrual process

43

Audit Documentation – Best Practice

• Physical Receipts

— All receipts must be retained for each transaction — This can be confusing in a One-Card Program This can be confusing in a One Card Program

— One Card combines PCard and T&E card functions — $75 T&E retention threshold established by IRS not applicable to state requirements

— Imaging is generally accepted as long as receipt image is legible — Cardholder is responsible for gathering documents Compliance with receipt retention policy must be monitored — Compliance with receipt retention policy must be monitored — Centralized/regional archive generally most effective — Ensure that documents can be timely accessed

44

Audit Documentation – Best Practice

• Electronic transaction data

— Review policies to ensure that electronic data is available for full statute

• f limitations periods
• f limitations periods

— Review data to validate that it correctly represents the nature and destination of purchases

Cards addressed to work location not a centralized corporate headquarters — Cards addressed to work location not a centralized corporate headquarters — Issuer’s reconciliation tools promote accurate data gathering from cardholder — Appropriate assignment of defalut GL/cost center C dh ld d t d illi ti i t — Cardholders understand reconcilliation requirements

45

Compliance Management – Best Practices

• Generally, compliance is more efficient and accurate if cardholders

involvement is limited. Some examples of cardholder involvement might include: include:

• Cardholders enter amount of tax collected
• Cardholders select check box when sales tax collected
• Limits on card use generally not effective because this containment approach

is outweighed by program growth fueled by financial incentives. Some examples of containment might policies include: S di li it d l t l l (i t t ) d

• Spending limited only to local (in-state) vendors
• Spending limited only to vendors that collect sales tax
• Spending limited to vendors providing Level II or III data

46

Compliance Management – Best Practices

• If PCard will be used to purchase centrally for goods to be delivered to other

locations, the reconciliation software must provide an opportunity for the use to indicate the alternate delivery location to indicate the alternate delivery location.

• Taxable/Exempt Cards – Some purchasers may effectively manage purchases

by using specific cards for taxable purchases, and an alternate card for exempt purchases. For example, a shop supervisor may be purchasing taxable p p p , p p y p g items use in maintenance and exempt items that are consumed in the manufacturing process.

• Ghost Cards – account number lodged with merchants to pay for company

wide purchases. Tax agreement should be in place prior to the issueance of the card number to the vendor.

47

Compliance Management: Best Practices

• Use tax accrual

― Decide how conservative your organization wants to be

• Direct pay permits

― Allow taxpayer to purchase goods without paying sales tax, and to self-assess tax on all taxable purchases ― Keep close track of which vendors to which you give a direct pay certificate to which you do not direct pay certificate to which you do not ― Don’t overpay; know what’s taxable

48

Compliance Management: Best Practices (Cont.)

• Managed audits

― ”Taxpayer-performed” audit ― Taxpayer’s recordkeeping is often considered in determing whether taxpayer qualifies for a managed audit program program. ― Many states waive interest and/or penalties completely

• r up to a certain amount.

49

I l C l B P i Internal Controls: Best Practice

• Provide adequate training to cardholders and approving

Officials Require cardholders and approving officials to attend ― Require cardholders and approving officials to attend training on internal procedures and their responsibilities ― Make additional training available, as needed

• Enforce record retention policies at the cardholder level
• Monthly reconciliations and internal audits
• Consistently follow and enforce internal procurement card

procedures

50