Under Latest SEC Orders and Guidance Best Practices for Setting - - PowerPoint PPT Presentation

Sales and Use Tax Reserve Strategies Under Latest SEC Orders and Guidance

Best Practices for Setting Reserves Amid Government and Audit Scrutiny

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TUESDAY, MARCH 12, 2013

Presenting a live 110-minute teleconference with interactive Q&A

William Ault, Director, Crowe Horwath, New York Myron Vansickel, National Tax Director, Strategic Accounts, Experis, Washington, D.C.

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Sales and Use Tax Reserving Strategies Under Latest SEC Orders and Guidance Seminar

Myron Vansickel, Experis myron.vansickel@experis.com

March 12, 2013

William Ault, Crowe Horwath william.ault@crowehorwath.com

Today’s Program

Review Of Material Terms Of ASC 450 [William Ault] Hypothetical Taxpayer Sales Tax Reserving Scenarios [Myron Vansickel] Slide 8 – Slide 20 Slide 21 – Slide 54

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

7

REVIEW OF MATERIAL TERMS OF ASC 450

William Ault, Crowe Horwath

Loss Contingencies: Material Terms

• I. Recognition
• Probable, reasonably probable and remote
• Estimable
• What is a liability and what is a loss contingency?
• II. Measurement rules and an estimated range of loss
• III. Disclosure rules: Probable and reasonably possible

contingencies

• IV. Recent end to FASB’s project on loss contingency disclosure

requirements

9

Recognition Of A Loss Contingency

An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met:

• a. Information available prior to issuance of the financial

statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss.

• b. The amount of loss can be reasonably estimated.

10

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Probable, Reasonably Possible Or Remote?

Probable: The future event or events are likely to occur. Reasonably possible: The chance of the future event or events

• ccurring is more than remote but less than likely.

Remote: The chance of the future event or events occurring is slight.

12

Can The Amount Of The Loss Be Reasonably Estimated?

The requirement that the loss be reasonably estimable is intended to prevent accrual in the financial statements of amounts so uncertain as to impair the integrity of those statements. Disclosure is preferable to accrual when a reasonable estimate of loss cannot be made. Does it relate to the current period or a prior period?

13

Loss Contingency Vs. Liability

A loss contingency is defined as an existing condition, situation or set of circumstances involving uncertainty as to possible loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. Amounts owed are not contingencies even though the accrued amounts may have been estimated. There is nothing uncertain about the fact that those obligations have been incurred.

14

Measurement Of A Loss Contingency

When both of the recognition criteria are met, and the reasonably estimable loss is a range, accrual is required of:

• The amount that appears to be a better estimate than any other

estimate within the range, or

• The minimum amount in the range, if no amount within the

range is a better estimate than any other amount.

15

Disclosure When A Loss Contingency Is Not Recognized

Disclosure of the contingency shall be made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred. The disclosure shall indicate the nature of the contingency and shall give an estimate of the possible loss or range of loss, or state that such an estimate cannot be made.

16

Disclosure When A Loss Contingency Is Not Recognized (Cont.)

Disclosure is not required of a loss contingency involving an unasserted claim or assessment, when there has been no manifestation by a potential claimant of an awareness of a possible claim or assessment, unless:

• It is considered probable that a claim will be asserted, and
• There is a reasonable possibility that the outcome will be

unfavorable. Information may become available indicating that an asset was impaired or a liability was incurred after the date of the financial statements, or that there is at least a reasonable possibility that an asset was impaired or a liability was incurred after that date.

17

The FASB’s Loss Contingency Disclosure Project Ends

Decision reached at the July 9, 2012 board meeting: The staff summarized its outreach with regulators and provided a short review of the feedback received on the two previous exposure drafts. The staff posed the question to the board as to whether the project should remain on the agenda, and if so what the next steps are. The board voted 5-2 to remove the project from the agenda, with no further action.

18

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Scope Of FASB July 2012 Invitation To Comment

The invitation to comment applies only to notes to financial

• statements. It does not address parts of a financial report outside
• f financial statements, such as management’s discussion and

analysis (MD&A). The invitation to comment applies to financial statements of public and non-public entities.

20

HYPOTHETICAL TAXPAYER SALES TAX RESERVING SCENARIOS

Myron Vansickel, Experis

Case Study: Application Of ASC 450

Sales and use tax reserves have come under more scrutiny as a result of the enactment of the Sarbanes-Oxley Act and pressure on state and local jurisdictions to raise revenue. The SEC is now following up on contingent liabilities as well. Senior management has become aware of internal controls to understand what is in each reserve, and sales and use taxes have greater visibility before the C-suite now.

22

Nexus Reviews

Regarding nexus, as it relates to the level of activities a business performs within a given state and meaning a connection such that the taxpayer enjoys state benefits such as courts, fire and police protection

• Review what activities a state dictates that create nexus for sales tax

collection and/or use tax payments

• Review business expansion plans, when possible, in order to be proactive on

identifying new states where nexus has been created

• Nexus meaning a connection to the State where the taxpayer in is enjoying

the benefits the State has to offer, such as, the state courts, fire and police protection.

23

Voluntary Disclosure Programs

The majority of states use voluntary disclosure agreement (VDA) programs that allow an unregistered taxpayer to present itself to resolve outstanding tax liabilities. These programs usually allow for a limited lookback period for taxes, and may limit interest and waive penalties. Review each state’s program to understand what its requirements are, and if interest is capped and/or penalties waived Also, be aware of what taxes are available to resolve under a VDA. Most commonly, income/franchise and sales/use taxes qualify. Other taxes may be included, but be aware that when you apply for one tax, the taxing authorities may ask if you have complied with all taxes due and owed to their state.

24

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Case Study: Application Of ASC 450 (Cont.)

Corporation V Corporation V is a publicly traded media and printing company with $2 billion of annual revenue. In 1999, it was composed of 35 U.S. companies with three major business lines. The consolidated financial statements showed a $7 million ASC 450 sales/use tax contingency. Of that figure, $6.7 million was related to sales tax. Annual additions to the reserve were close to $1 million.

26

Case Study: Application Of ASC 450 (Cont.)

Where do you start the analysis to determine whether this reserve is adequate for potential exposure? What caused this reserve to grow? Should this reserve be greater or less?

27

Case Study: Application Of ASC 450 (Cont.)

Information-gathering is the first step. After reviewing prior sales and use tax audits, it was determined that the majority of assessments were for sales tax on products; then came use tax on purchases of supplies and fixed assets.

28

Case Study: Application Of ASC 450 (Cont.)

The first areas to review were the order entry, sales tax rates, sales tax determination, and the computation module and billing system. The process was to determine how product codes were set up as either taxable or non-taxable.

29

Case Study: Application Of ASC 450 (Cont.)

It was discovered that the taxpayer had three different ERP systems, which had varying degrees of sophistication regarding their abilities to tax the companies’ products correctly.

30

Case Study: Application Of ASC 450 (Cont.)

The largest ERP system was reviewed to determine the level of compliance. It was determined that there were several disconnects within the system, and the tax and IT staffs would have to identify issues and resolve them

• together. This was an older version of tax software in which coding

changes needed to be implemented to make tax corrections.

31

Case Study: Application Of ASC 450 (Cont.)

The other two ERP systems had both similar and dissimilar issues related to taxing products. Issues were identified, and then plans were implemented to resolve these issues.

32

Case Study: Application Of ASC 450 (Cont.)

New versions of sales tax software now allow the company tax department to make the tax determinations directly, due to the data basis

• nature. This eliminates IT maintenance time and allows for timely changes

within the system.

33

Case Study: Application Of ASC 450 (Cont.)

Corrective action plan: Re-compute the reserve requirements on what was learned and use this as the benchmark to measure improvement A product code matrix was developed that included all other separately stated invoice items, e.g. shipping costs.

34

Case Study: Application Of ASC 450 (Cont.)

Review the matrix and add a taxable or non-taxable column Reference appropriate tax research to support the tax determination Review this matrix with what was already in the system, and prepare a corrective action plan

35

Case Study: Application Of ASC 450 (Cont.)

The tax department continued to investigate whether the company was filing in all jurisdictions where it had created nexus, for sales tax purposes. This required reviewing the business operations, including the sales force, to determine what activities were occurring that might create nexus for collection responsibilities.

36

Case Study: Application Of ASC 450 (Cont.)

After coming up with a revised list of taxing jurisdictions, tax met with the legal department to determine where the company should be registered to “do business” and register for sales tax collection.

37

Case Study: Application Of ASC 450 (Cont.)

Subsequently, with the legal department’s and CFO’s support, the tax department became the clearinghouse for determining where the company needed to qualify to do business and register for sales and use taxes.

38

Case Study: Application Of ASC 450 (Cont.)

This meant that every time a new home office or new state needed to be established, for payroll purposes, the tax department was notified and investigated if nexus was created. The tax department initiated all registrations for taxes, whether payroll or sales/use, through the legal

• department. This kept the tax department immediately in the know about

any business change that would affect sales and use tax collection.

39

Case Study: Application Of ASC 450 (Cont.)

The next phase was to implement the necessary changes for sales tax that arose from errors identified in sales tax audits. This was done via a product code matrix/tax determination process.

40

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Case Study: Application Of ASC 450 (Cont.)

Fixed-asset purchase procedures were reviewed, and use tax accrual procedures were developed and implemented. Printing companies are similar to manufacturers in many aspects, so in several states, their equipment purchases were exempt. However, some states lacked an exemption, so use tax needed to be paid.

42

Case Study: Application Of ASC 450 (Cont.)

Tax audits were reviewed for the types of expense purchases that were subject to use tax. A taxability matrix was developed, similar to the product code/tax determination matrix. This was implemented through the purchasing chain in order to provide for appropriate accrual of use taxes.

43

Case Study: Application Of ASC 450 (Cont.)

The tax department developed use tax accrual worksheets that included the appropriate use tax rates, to facilitate the accrual process. Although manual, they did provide a mechanism to facilitate compliance.

44

Case Study: Application Of ASC 450 (Cont.)

The tax department implemented policies and procedures regarding company purchases, in order to take advantage of resale and manufacturing exemptions where applicable.

45

Case Study: Application Of ASC 450 (Cont.)

The tax department, along with the sales force, reviewed customer files to validate whether the customer should complete a resale certificate or an exemption certificate.

46

Case Study: Application Of ASC 450 (Cont.)

Policies and procedures were then implemented in the sales-ordering process, in order to obtain appropriate documentation from each new

• customer. Annual reviews of customer files were performed to make sure

that valid resale and exemption documentation were maintained.

47

Case Study: Application Of ASC 450 (Cont.)

The company’s reserve dropped to less than $500,000 within five years, based on the implementation and review of controls. Annually, steps taken reduced the cost of audits by about $900,000. That is a dollar-for- dollar pick-up to the bottom line.

48

Case Study: Application Of ASC 450 (Cont.)

Information needed to calculate the ASC 450 sales/use tax reserves: Remember that your company may have nexus issues, and that the statute of limitations do not run in a taxing jurisdiction until you have filed returns. I. Listing of all taxing jurisdictions where the entities have sales/use tax nexus

• II. Date the business began operating in these taxing jurisdictions

49

Case Study: Application Of ASC 450 (Cont.)

• Listing of the statute of limitations for each taxing jurisdiction
• Date of registration in each jurisdiction
• Starting dates when returns were first filed in each jurisdiction
• Copies of all sales and use tax audits settlements for the past five

years, and any current issues from ongoing audits

• Develop a spreadsheet to incorporate all this information

50

Case Study: Application Of ASC 450 (Cont.)

Review the audit settlements and determine if corrective action was taken, and the time period during which any action was taken Calculate whether there was a unresolved time period for which an error was noted in an audit

51

Case Study: Application Of ASC 450 (Cont.)

Calculate the potential tax for each tax uncertainty for a time period that is still open under the statute of limitation Accrue the tax calculated in the reserve

52

Case Study: Application Of ASC 450 (Cont.)

Update your reserve monthly, as new uncertainties are uncovered and a month of the statute of limitations rolls off This will be the basis of your reserve analysis

53

Case Study: Application Of ASC 450 (Cont.)

Sales Tax Accrual Analysis - A/C 000-000-0000 6/30/2009 Tax Estimat ed Total Average Projected Audit Amount Date Unpaid Audit No. Of Audit Next Aud it Open Monthly Reserve Period Paid Paid Amount Liability Status Aud its Liability Assessme nt Peri

• d

Period s Assessme nt Accrual California Jan-84 - Mar-87 352,653 352,653 Final 1 36 Jul-87

• Dec-90

450,000 450,000 Final 2 36 Jan-91 - Dec-94 1,152,45 5 1,152,45 5 Final 3 651,703 36 Jan-95 - Dec-97 80,000 Final 4 508,777 36 Jan-98 - May-98 Lapsed 5 Apr-98 - Dec-00 333,833 10/01/02 Final 5 473,788 33 Jan-01 97,692 Self audit 36 Sep-04 93,511 01/01/06 Final 6 426,691 9 Oct-04 Dec-07 126,600 05/01/09 Final 7 36 Jan-08 Jun-09 Accrual 100,000 36 18 2,778 50,000

54