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"By using Sabrix for your sales and use tax processes, you will have a solid foundation for managing the complexities outlined above. Sabrix MTS starts at the transaction level and builds from there. We implement your company's tax policy in our system to ensure that each of your legal entities has its own policy and its own taxation rules."
Source : Sabrix
Road Map to Developing a Successful Tax Policy: Nine Critical Components
Tax Policy is also known as :
Best Tax Policy,
Business Tax Policy,
Corporate Tax Policies,
Corporate Tax Policy,
Current Tax Policies,
Economic Tax Policy,
Government Tax Policy,
Good Tax Policy,
Current Tax Policy,
Income Tax Policy,
Independent Tax Policy,
Local Tax Policy,
New Tax Policies,
New Tax Policy,
Optimal Tax Policy,
State Tax Policy,
Tax Business Plan,
Tax Policies,
Tax Policy,
Tax Policy Analysis,
Tax Policy Articles,
Tax Policy Change,
Tax Policy Changes,
Tax Policy Division,
Tax Policy Economics,
Tax Policy Effects,
Tax Policy Expert,
Tax Policy Experts,
Tax Policy Institute,
Tax Policy Issues.
What is a tax policy? Why is it important?
Nine critical components to a
successful policy.
INTRODUCTION
Sales and use tax compliance is serious business. When you think of what your
company spends in money, time and effort to manage compliance, and add to it the
potential penalties for not getting it right, the seriousness is abundantly
clear. On average, businesses face a 90 percent chance of being audited once a
year, with penalties and interest averaging $10,000 to $30,000 annually1. At the
same time, you are tearing highly paid finance and tax professionals away from
more strategic activities, and dedicating huge percentages of their time to
fighting tax fires and defending the company in tax audits. And this is all
around a costly business activity that does not contribute one iota to the
growth of the business.
This scenario — common to companies of all sizes — highlights the importance
of investing a measure of time and effort upfront to formulating a transaction
tax policy that will minimize costs, pains and penalties later on. This
whitepaper discusses:
- The importance of a tax policy
- How to make it part of your business process and procedures
- The nine critical components of a tax policy
Focusing on best practices for developing a tax policy, it examines what you
need to know about your company, its operations and its resources; what you need
to map out in advance to respond effectively to audits; and how to best handle
your tax-relevant data and staffing.
I. WHAT IS A TAX POLICY…AND HOW DOES IT HELP YOUR ORGANIZATION?
A sales and use tax policy documents the goals, responsibilities and
guidelines of your tax department. In accomplishing this, a comprehensive policy
sets you on the path to meeting your legal, regulatory and internal
requirements, with minimal problems downstream and optimal management of
resources.
More than just a departmental blueprint, a tax policy affects the entire
enterprise. Hence, as it sets down all the strategies and procedures necessary
to ensure transaction tax compliance, it does so within the framework of your
company’s over arching corporate policies, objectives and operating environment.
Consequently, a successful policy helps you and your department get the job done
vis a vis the rest of the company. It integrates tax issues with overall
corporate operations, smoothes out the pain points in dealing with the larger
organization, and puts in writing everything your resources — both internal and
external to the tax department — need to do, as well as how they need to do it.
This “no surprises, all T’s crossed and I’s dotted” approach is essential to
minimizing tax problems and costs. But there is another important dividend. Tax
professionals are paid to plan, not just gather information and do battle with
auditors. A solid tax policy frees you to focus more of your time of the
strategic aspects of tax management, and much less time putting out fires.
A sales and use policy documents the goals, responsibilities
and guidelines of your tax department.
II. THE 9 CRITICAL COMPONENTS OF AN EFFECTIVE TAX POLICY
There are nine key components to an effective tax policy. Some are outside of
your departmental control. Some are even outside of your corporation’s control.
But all have to be reflected in the policy as a matter of best practice.
1. Corporate structure and operations
The first step in devising a tax policy is understanding your corporate
structure and how it impacts tax management. This necessarily starts with where
you do business. Are you strictly domestic or international? In which states and
other tax jurisdictions are you operating?
You can then begin to factor in the structure and complexity of your
operations. Are you a manufacturing, services or retail company? Do you sell
online? Where are your physical sales outlets? Do you have hundreds of locations
or just a few?
Finally, you also need to look out to the future. What are your expansion
plans? Will you expand into new locations or markets? Will you be adding
products? Will you be acquiring other companies? The answers to these questions
all have a fundamental impact on your transaction tax picture, and have to be
taken into consideration in devising your policy.
2. Internal and external controls
All companies are subject to some type of mandatory internal and external
controls. In devising a tax policy, you need to determine how these controls
affect your tax department and build them into your policy. The logical place to
start is with your internal audit group, followed by the legal department.
Together these people can work with you in understanding the controls that are
relevant to your task, what is needed in terms of keeping documentation,
corporate rules about talking to outside people (i.e.: tax auditors), etc.
By definition, these controls will be restrictive. So you also need to
determine how you and your department will work within their constraints. For
example, you will need a place in your tax policy that outlines how the company
deals with tax auditors. Furthermore, what you implement will have to align with
your company’s internal controls. Hence, you need to determine whether audits
are, say, managed from the corporate office or from individual plant locations.
And, to be consistent with internal rules about talking to outsiders, you also
need to think hard about what kind of instructions you can give to people about
responding to audits.
3. Know your systems
Most businesses have a mixture of manual and automated processes and a range
of disparate systems — ERP, POS, eProcurement, tax systems, etc. — that impact
transaction tax compliance. You may also have legacy systems in the mix, each
with its own peculiarities. Applications may have been internally or externally
developed, and may run internally or externally as well.
The big questions are: how do you get information out of these systems, what
do you have to do to the extracted data in terms of manipulation, and how do you
document the process? Backing up this process with a tax policy saves
frustration, time and money.
The big questions are: how do you get information out of these
systems, what do you have to do to the extracted data in terms of manipulation,
and how do you document the process?
4. Tax systems
Be realistic about your most important system — your tax system. This system
should be integral to your overall financial solution, integrating with your
ERP, eProcurement and other key financial systems. Is it providing you the tax
data you need? Is it capable of addressing your current and future business
requirements?
Here is where understanding your corporate structure and operations really
starts to pay off. Make certain you are aware of all your operations and all the
variables that affect sales and use tax, including the various states where you
have or are likely to have tax nexus. Consider your growth plans. Is the company
open to growth through acquisition? If so, think about how that will impact your
tax reporting, and whether your tax system allows you to easily connect to
additional disparate systems.
Similarly, think about compliance. Will your tax system and associated tax
processes enable you to deal efficiently, and cost-effectively, with tax audits
as you grow? Will you have time for tax planning, or will you just be battling
an increasing number of fires?
And consider your internal reporting requirements. If you have to report up
to corporate, does your tax system adequately support that process? Are
processes even in place to allow you to do that in a timely, accurate and
efficient manner?
Finally, if you still have to deal with manual processes, do you have
policies in place that will allow you to automate? Automation, after all, should
be a fundamental goal as it enhances all aspects of tax management and
compliance — from accuracy to timeliness to cost-effectiveness.
5. Data and documentation
Complete, reliable and easily accessible data is the life-blood of
compliance. You need to plan ahead and have your systems in place, and your
processes (sales order, purchasing, etc.) in line, before you get to an audit,
so you have easy access to the complete and accurate data you need.
You also need to be able to verify the accuracy of your data, and ensure that
it is in a format that allows you to easily report and prepare responses to
audits. And you want to pay attention to how easy it is to obtain archived data,
and be prepared to influence company policies regarding data retention so that
the data you may need down the road is sure to be preserved.
As always, you also need to keep an eye on the future. Business changes such
as buying or selling a line of business or other changes in operations can
impact your data and reporting requirements. So too can new or upgraded business
software. On that note, if a key software or system upgrade is in the cards, you
might want to take it as an opportunity to also upgrade your tax solution.
Make certain you are aware of all your operations and all the
variables that affect sales and use tax, including the various states where you
have or are likely to have tax nexus.
6. Compliance
At the risk of stating the obvious, the quest for compliance needs to inform
every aspect of a tax policy. And the policy itself needs to cover every process
in your company associated with compliance.
This starts with who actually performs your compliance activities. Many
companies find that it makes economic and strategic sense to outsource all or
parts of their transaction tax management activities. Outside specialists might
be tapped for their expertise, or simply brought in to bolster a staff already
spread thin. A tax policy needs to comprehensively address third party
involvement and when and why it should be triggered, even when such involvement
is only anticipated.
A tax policy also needs to ensure that you and your department can work
effectively with the overall business and all relevant business processes, from
sales orders and billing to procurement. For example, you can avoid considerable
pain and confusion if you have in place policies and procedures that address
such everyday issues as your department’s role in the sales order process,
whether you provide estimates of tax to your customers, and so. Similarly, you
can avoid substantial hassles if you have in place automated processes and
solutions for accurately identifying customers that should be exempt, particular
product exemptions, or customer product combinations that affect exemptions.
The idea is to ensure you have the structure, procedures, data and
documentation in place to minimize your compliance burden. Can you report by
legal entity? Are you able to easily gather detailed documentation on each
country, state or tax jurisdiction you operate in? Plan ahead, not behind,
because making certain you have your structural and data requirements buttoned
up will have an immensely positive impact on the effort you put into your
audits, as well as on their outcome.
7. Tax planning
A major component of a tax department’s job is to help arrange corporate
business affairs so as to minimize taxes. A tax policy needs to take into
account this crucial task. Thus the policy should cover how your department will
handle strategic tax planning and when you should engage in it. A tax policy
should also ensure you have the flexibility to put adequate time into tax
planning. Again, your department is hampered by time-consuming and error-prone
spreadsheet-based processes, you need to think about how automating and perhaps
outsourcing would enable you to free up time and resources to do tax planning —
and then bake that into your tax policy.
8. Audit planning
Audits are where the rubber meets the road, and pre-planning for them is
essential. You need to know an audit’s objectives, and then be able to assign
qualified people to work on the audit armed with the proper data and
documentation. A tax policy needs to state and provide for this.
Here are some of the key things you need to do prior to an audit, all of
which should be reflected in your tax policy. One: know your prior audit
history. What were the prior audit issues and where they corrected? If so, how?
Do you have documentation of the corrections? Auditors are becoming more
aggressive and if they discover you haven’t corrected what they uncovered
earlier with better polices and procedures, then you can expect questions
regarding why the issues haven’t been addressed.
A major component of a tax department’s job is to help arrange
corporate business affairs so as to minimize taxes. A tax policy needs to take
into account this crucial task.
Two: pay attention to changes in business operations and systems. What has
changed since the last audit? Have you acquired a business or sold part of the
corporation? Do you have new lines of business? Have you upgraded a key system?
You need to document these changes, and state in your policy how to handle the
documentation.
Three, are you open to pre-audit negotiations? This can help reduce the time
spent in an audit. You need to provide for such negotiations, including when and
how to avail yourself of the opportunities they present, in your policy.
Four, have prepared audit guidelines. Have an audit policy in place before
the audit begins. Determine upfront who represents you in an audit, who the
auditors can talk too, how much freedom of movement will the auditors have in
your facilities, etc.? It’s generally advantageous to have an Audit Ready File
ready when the audits are on-site, with all the data and documentation you think
you may need. You need to have guidelines for the preparation and maintenance of
such a file as well. Also determine whether the auditor will be allowed to have
system access.
9. Staffing
Tax departments do not function in isolation from the rest of the enterprise.
You need to staff appropriately to support your tax policy, but it’s not just
your direct staff you have to think about. You need to think about the other
departments that touch your job as well. All these peoples’ roles need to be
documented in the policy.
This extends to outsourced resources as well. Relying on skilled outside tax
or tax system experts is an option that allows you to avoid maintaining costly
specialized expertise in house, and can free internal headcount for tax planning
and other strategic tasks. A tax policy should take into account when, where and
how outsourcing can augment internal resources. Much the same can be said for
automating tax management procedures. In fact, a tax policy needs to take
automation into account as well.
III. ENSURING A SUCCESSFUL TAX POLICY VIA AUTOMATION
Developing a tax policy takes work. It’s not something that happens
overnight. It will involve your staff, and the cooperation of other departments,
and there will be numerous revisions. All of this is to the good, because a tax
policy needs to be comprehensive, detailed and enterprise wide in scope, not
superficial, vague or departmental. The purpose of the policy is to help you do
your job by minimizing problems, saving time and money, and providing guidance
to your department and the entire business. That is certainly worth the upfront
effort.
Yet no matter what size business you are, it is not to your advantage to
develop a tax policy and then make its implementation a manual effort. It is
much more advantageous to implement your tax policy within an overall automated
tax solution. Managing sales and use tax compliance within an automated system
gives you the accuracy, efficiency and the checks, controls and balances that
enable you to most successfully execute your policy.
Relying on skilled outside tax or tax system experts is an option
that allows you to avoid maintaining costly specialized expertise in house, and
can free internal headcount for tax planning and other strategic tasks.
There are a number of options available to determining and complying with
taxability requirements depending on the size of your organization and the
complexity of your operations. If you are a large company, an enterprise
software approach may be the way to go, provided it incorporates a
comprehensive, integrated solution with your enterprise application and provides
an up-to-date tax research solution. If you are a mid- or small size company, a
managed solution or service can be attractive, especially one that enables you
to outsource not just automation and research but also tax expertise, returns
preparation, product taxability interpretation and audit support.
Sales and use tax compliance may not contribute directly to the growth of
your company, but that doesn’t mean it has to be a drain on that growth either.
A comprehensive tax policy, implemented in an automated environment, and
integrated with the procedures of the rest of the company, is the most effective
way to minimize the costs, pains and penalties associated with compliance
efforts.
ABOUT MARKETSPHERE CONSULTING, LLC
MarketSphere is a premier provider of business advisory services. We help our
clients improve their competitive landscape through innovative strategies to
improve efficiencies, reduce costs and enhance revenues. From the Fortune 500 to
small, nimble entrepreneurs, MarketSphere provides a world class perspective to
each organization we serve — adding value through unmatched quality, integrity
and objectivity. Visit
www.marketsphere.com for more information.
For more details on formulating a tax policy, contact MarketSphere at
888.532.3002.
About the Contributors
Debbie Di Meo, Director: As a leader of MarketSphere’s Tax Integration
Practice, Debbie specializes in helping companies to identify and address their
tax technology and business process issues. During her 20 year career in
industry and consulting, Debbie has specialized in tax integration for clients
ranging in size from the Fortune 500 to smaller organizations across multiple
industries including health care, technology, wholesale distribution,
transportation, energy, and manufacturing. Debbie is responsible for the
coordination of strategy, thought leadership, project delivery and market
performance of the Tax Integration Practice. Prior to joining MarketSphere,
Debbie was the founder of Hedrick Di Meo Consulting a consulting organization.
She can be reached at
debbie.dimeo@marketsphere.com.
Susan Wagner, Director: Susan Wagner is a Director of MarketSphere
Consulting’s Tax Integration Practice and has over 17 years experience that
includes positions in consulting and industry. Prior to joining MarketSphere,
Susan assisted clients with various state and local tax issues, including
implementation of strategic tax planning opportunities. Her industry experience
includes various management positions, with knowledge in federal and state tax
compliance, audit and planning, treasury and financial reporting, and accounting
systems implementation. She can be reached at
susan.wagner@marketsphere.com.
Sales and use tax compliance may not contribute directly to the
growth of your company, but that doesn’t mean it has to be a drain on that
growth either.
ABOUT SABRIX
Sabrix, Inc. is a leading provider of transaction tax management for
companies of all sizes, enabling finance, tax, and IT professionals to achieve
accurate, timely, and cost-effective compliance for sales tax, use tax,
Value Added Tax (VAT), excise tax and
industry-specific taxes and fees. The Sabrix Solution combines the Sabrix
Application Suite software for sales tax, use tax and value-added tax automation
with Sabrix Tax Research, delivering SAS 70 certified tax rates and rules for
the U.S. and 170 countries. The company also offers the Sabrix
Managed Tax Service™ (MTS), an outsourced
transaction tax compliance service that helps finance departments of
small-and-medium- sized businesses eliminate the hassle, control their audit
exposure, and reduce the total cost of compliance. Sabrix MTS seamlessly
integrates with a company’s existing accounting and e-commerce systems, and,
similar to outsourced payroll services, operates as a trusted extension of a
company’s finance department to address tax compliance from start to finish:
address validation, tax rate maintenance, tax determination and calculation,
returns preparation and filing as well as audit research and documentation. For
more information, please visit www.sabrix.com.
SABRIX®, the SABRIX logo, Consolidated Transaction Tax Management™,
Transaction Logic Engine™, SabrixConnection™, Sabrix Data Interchange™, the Tax
Control Panel™, and the Sabrix Solution Workbench™ are trademarks or registered
trademarks of Sabrix, Inc. or its subsidiaries in the United States and other
countries. All other product names or brands are trademarks or registered
trademarks of their respective manufacturers or owners. This version of this
document supersedes any and all previous versions of this document. This
document is the confidential and proprietary property of Sabrix, Inc. and is
intended solely for possession and use by parties who have received prior
written permission by Sabrix, Inc. This document is copyrighted and is protected
by worldwide copyright laws and treaty provisions. This document may not be
copied, reproduced, modified, published, uploaded, posted, transmitted, or
distributed in any way, without prior written permission from Sabrix, Inc©
Copyright 2009 Sabrix, Inc., All Rights Reserved.
SALES CONTACT
sales@sabrix.com
P. 1.866.4SABRIX
CORPORATE HEADQUARTERS
Sabrix Incorporated
12647 Alcosta Blvd, Ste. 155
San Ramon, CA. 94583-5180
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Contents
- Introduction
- I. What is a Tax Policy… And How Does it Help Your Organization?
- II. The 9 Critical Components of an Effective Tax Policy
- III. Ensuring a Successful Tax Policy via Automation
- About MarketSphere Consulting, LLC
- About Sabrix