You probably chose your ERP system to unify business processes, streamline productivity, and create visibility across operations. You likely chose additional modules that manage specific business functions such as accounts receivable, credit card payments, inventory, and distribution.
What you may not know is that audit risk often occurs in each of these business areas and, as a result, in each of the modules in your ERP system (subsequently, each of these modules correlates with a step in the supply chain). The supply chain is one of the trickiest areas to navigate in the world of sales tax compliance, often involving sales tax, use tax, exemption certificates, and headaches. Creating a tax-efficient procurement process is the best way to protect your business in this often high-risk audit environment. But where do you start?
Okay so, what exactly is the “supply chain?”
Supply chains are continually changing and operating within the scope of modern technology limits. But in its simplest form, a supply chain is created to efficiently move raw materials and product from point A to point B (supplier to customer) ultimately into the end consumer’s hands. The ‘suppliers’ and ‘customers’ encompass a series of raw materials vendors, manufacturers, wholesalers, distributors, resellers, retailers and end consumers. Within this supply chain are different kinds of technologies to facilitate goods procurement and movement – strategic sourcing systems, ERP/Order Management systems, ecommerce systems, mobile and POS technologies.
Today companies are continually redesigning long and complex supply chains to reduce resource and raw material costs and the associated carbon footprint generated by moving goods long distances. Companies need to understand from a more holistic point of view the impact of measurable costs (both tangible and intangible), customer service levels, and other associated costs with different supply chain network layouts.
Why is tax compliance so difficult? Is it procurement?
End to end supply chain tax compliance is difficult for a multitude of reasons.
Firstly, at the most basic level, there is no one single version of truth throughout the entire supply chain process for tax compliance. Every company in the supply chain process has their own understanding of what ‘tax compliance’ really means for their products. With all of the different procurement, order entry and ecommerce technologies used within the supply chain and varying sophistication of automated tax technologies, it is next to impossible to be 100% correct all of the time.
Secondly, nearly every state has its own version of truth surrounding tax compliance ranging from nexus requirements to state and jurisdiction product taxability rules to state and jurisdiction order sourcing rules to determine taxability of the product being sold. Add in constant jurisdiction boundary changes, state and jurisdiction tax rate changes, various tax exemptions and a myriad of product taxability rules you have the perfect storm of complexity. No state is going to award a business a gold star for accuracy, they will only be notified (and potentially penalized) if tax compliance is done wrong.
What do you think the riskiest areas in the supply chain are for tax errors?
Probably the riskiest, and hardest part is the collection, maintenance and management of exemption certificates. Keep in mind, sales tax in the united states is typically imposed on the consumer. So every step along the supply chain involves either a manufacturing exemption or a sale for resale. Each company in the supply chain up to the retailer has to both issue a certificate and collect one. That certificate has to be kept, on file, and accessible, if and when an auditor requests it.
Businesses who deal with this must be feeling a lot of pain. What are they doing to deal with the complexities?
The wrong answer is to throw human resources at the problem of state tax compliance. The ROI is just not evident. Tax compliance is really a non-revenue generating activity for any organization – it is not an item you will see on a P&L statement. A solution that removes the human element from the entire tax compliance process which automates the product movement touch points between companies in a supply chain is the growing trend. What most companies are turning to is the automation of exemption certificate management, and the integration of an exemption certificate solution into their billing system. By applying tax based on certificates being stored, the audit risk is drastically reduced.
Want to learn more?
Reduce audit risk and ensure compliance by reading this infographic on tax compliance issues in the supply chain.
