How 33 companies are resolving the state sales & use tax challenge while realizing significant business benefits with the purchasing card.

Transcription

1 No matter how they recorded sales and use taxes with purchasing cards, no company in this study was assessed a penalty and all reported savings, many of $1 million or more. * How 33 companies are resolving the state sales & use tax challenge while realizing significant business benefits with the purchasing card.

2 Sales Tax Issues For Purchasing Card Transactions: A Report on the Practices at Leading Companies, Page 5....this study included a cross section of industries including manufacturing, insurance, utilities, retail and entertainment (with revenues) from $1 billion to over $100 billion...

3 Sales Tax Issues with Purchasing Cards: An Independent Analysis. Since the first Purchasing Card (PCard) was introduced in 1993, 1 PCards have been adopted by many corporations. Originally designed for the estimated $500 billion 2 maintenance, repairs and operational materials (MRO) market, today PCards are also used to purchase capital equipment and inventory items, make recurring payments and pay service providers. Virtually all purchasing professionals recognize the PCard s cost efficiencies and ability to streamline the procurement process; yet many companies have not yet fully implemented PCard programs. While there can be multiple reasons for this (including corporate culture or internal resistance), perhaps the most prevalent reason is the fear of state audits and penalties for possible noncompliance with sales and use tax accounting occasioned by the use of PCards. To address these concerns, Gunn Partners, an Exult Company specializing in Best Practices and Purchasing Card research and consulting, 3 was commissioned by MasterCard International to examine the Purchasing Card programs at a number of large corporations which have resolved the tax issue, to determine Executive Summary > The Gunn Partners study reviewed PCard practices at 33 companies with an average annual PCard transaction volume of $49 million. > These companies used many different processes to determine sales and use tax liability. > No matter what process they used, none of the companies experienced more than nominal back-tax payments. > A recent Tower Group report estimates the total cost of the average purchase order transaction at $60, while another Gunn Partners study found it to be even higher ($77.02) and reported that PCards could save an estimated $47.75 of this cost per transaction. 4 > How they handled the sales and use tax issue and, in particular... > What the results were as state auditors looked at these transactions. The results of this authoritative, independent study are presented in this document. (Front Cover) Analyst s Summary of Gunn Partners study Sales Tax Issues for Purchasing Card Transactions: A Report on the Practices at Leading Companies (hereafter cited as Gunn Report). 1 The first purchasing card was introduced in 1993 by MasterCard International. 2 Packaged Facts, May Current Gunn Partners clients include JPMorgan Chase, Dun & Bradstreet, General Electric, Johnson & Johnson and Motorola; for the complete list, please visit 4 See page 9 of this booklet for more detailed information on PCard savings. 3

4 Gunn Report, Page 19. The question of which (process to use) must be answered within each company based on culture, geographics, tolerances for surprises and the importance of maximizing the savings opportunity.

5 The Challenge of Compliance: Which Practice is Best? As every purchasing, financial and tax professional knows, it is the purchaser s responsibility to ensure that the appropriate sales and use taxes are paid, whether or not the merchant collects sales tax. To do this, companies using PCards have developed many ways to record sales and use taxes. The 33 companies in this study adopted methods which included: > File Receipts: Attach receipts to monthly statement, send to manager and then card administrator, who files them. The simplest, least costly approach. > Statistical Sampling: Periodically sample receipts, calculate the percentage that did not apply sales taxes, and use this to accrue estimated sales taxes. Easy and efficient. > Cardholder Action: Compare receipts to PCard statements, identify untaxed purchases and notify card administrator, who sends them to the tax department. Also easy and efficient. > Level 2 or 3 Data: For purchases from merchants who include tax data in the transaction feed (plus a data field with Level 3). Eliminates the need for paper receipts. > Direct-Pay Permits: Issued by 33 state tax authorities, these allow the company to estimate and pay sales taxes directly to the state instead of the merchant. Easy to maintain after setup. Many methods, one result After exhaustive analysis (including site visits to 16 companies, during which their card administrators and tax department representatives were interviewed), the Gunn Report found that: > There is no one best practice for sales and use tax handling; many proved acceptable. > Organizational issues including corporate mandates, risk and fraud tolerance and geographic location can help companies determine which method or methods to employ, and need not restrict PCard usage or savings. > Of these issues, fraud (a prime concern in the early days of purchasing cards) is increasingly considered a non-issue. This is because inappropriate PCard use is extremely rare, and in the vast majority of companies has never occurred at all. > Software and Self-Assessment: Electronically sort out-of-state transactions to determine purchases for which use tax are due. Virtually eliminates use tax underpayments. 5

6 Gunn Report, Page 19. Regardless of the method chosen by the companies in this study, none had experienced more than nominal back-tax payments and nearly all have achieved savings that, by far, exceed the payments...

7 Achieving Compliance: Proven Solutions. Collectively, while the 33 companies in the Gunn Partners study applied all of the sales and use tax processes outlined on the previous page, this didn t affect the results. All approaches proved successful. Indeed, of companies using the file receipt method, the most popular and least costly method of all: > 23% of the companies audited were found not liable for any additional taxes. > 23% actually received a refund for overpayment of sales and use taxes. > No penalties were assessed for any company, and only nominal payments were required. For example, one company voluntarily found and paid use taxes of just under $20,000 a sum considered insignificant when compared to their annual PCard savings. > 43% of the companies were not audited at all. No one approach is best. But some are better than others. > The File Receipt method is the least expensive and most widely used approach. > Software and Self-Assessment was found to virtually guarantee there is no underpayment of use taxes. When state auditors were appraised of this process, they often declined to audit PCard purchases for various reasons, including the likelihood that no underpayments would be found. > Statistical Sampling mirrors the methodology of state auditors and should yield similar results. As a result, when confident of the integrity of the sampling, state auditors usually accept it. 7

8 Gunn Report, Page 3. Since many companies have moved hundreds of thousands of transactions to the card, their savings often exceed a million dollars annually.

9 Measuring The Potentials: How Much Can PCards Really Save? The Tower Group estimates that the average purchase order transaction costs the buyer about $60. 1 Another Gunn Partners study estimates this cost as $77.02, and found that PCards produce an average savings of $47.75 per transaction. 2 And the National Association of Purchasing Card Professionals reports Estimates of the transactional cost of the purchase order and payment process range from $50 to $250. (PCard) efficiencies (save) from 55% to 90% of this...cost. 3 There are other ways of counting the savings that PCards enable. For example... > One company is saving $3.5 million annually, based on its total PCard volume of $172 million. > Additional savings can be achieved in Purchasing Departments by freeing Buyers from low dollar transactions, so they can spend more time negotiating on larger purchases. > Ultimately, the entire enterprise can gain as PCard-based companies further streamline work processes, control procurement costs and integrate PCards with e-procurement and ERP systems. Do PCards automatically ensure these savings? Of course not. > The implementation of a PCard program requires careful preparation, for it can be successful only with the support of senior management, purchasing and procurement managers, corporate cardholders and even suppliers. > Your PCard issuer will be your best source of information and assistance, and can provide you with such helpful materials as the Corporate Purchasing Card Implementation Guide from MasterCard International. > Another helpful PCard resource is the National Association of Purchasing Card Professionals ( The bottom line: The companies in this study all achieved their goal of reducing costs, while minimizing their exposure to sales and use tax audits and penalties. 1 Commercial Payment Cards in the US: Product Overview (December 2001). 2 Corporate Purchasing Card Implementation Guide, Page (select Basics then Savings). 9

10

11

12 2002 MasterCard International Incorporated. All rights reserved.