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Use Tax Liability Tracking in Accounts Payable

Use Tax Liability TrackingHere's the scenario:  Your company occasionally buys goods/services from vendors located outside your state/city and you need to track which AP invoices need to be included in a state/city Use Tax filing. The vendors are not registered in the local tax jurisdictions so they do not charge sales tax on their invoice.

What do you find works best given that the occurrence of such purchases is occasional each month?

1. Do you create an accrual for Use Tax at the time of AP invoice entry? E.g. if invoice is $100, and Use Tax is $6, do you Debit Expense $106, Credit AP Vendor $100 and Credit Accrued Use Tax $6? Then analyze the Accrued Use Tax at month end to prepare your filing?

2. Do you make a copy of the invoice and manually calculate the Use Tax liability at month end?

3. Do you query your AP Vendor list and look for likely out of state bills?

4. Other?

Answers

Michael Jameson
Title: VP Finance
Company: Undisclosed
(VP Finance, Undisclosed) |

Um, outsource it :). Seriously. There are service providers small and large who do this for a living. Ask your audit/accounting firm, they probably have some capability in-house. You send your transactions to them monthly, they analyze for Use tax and can prepare the accounting entries for you and prepare the state filings. In my experience this is usually a pretty low-level person at the firm and therefore the billings are surprisingly reasonable. And I find they catch things I wouldn't and they know what NOT to include, saving you the hassle and mis-filed/mis-paid taxes. In such a specialty area I find that outsourcing to inexpensive specialists really pays dividends.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Michael-thanks, that may well be an option due to low volume/frequency.
Regards
Len

Topic Expert
Brenda Morris
Title: Board of Directors, Audit Committee Chai..
Company: Boot Barn
(Board of Directors, Audit Committee Chair, Boot Barn) |

Some of my AP teams have had the ability to mark the invoice in the accounting system as use taxable and the system calculates the tax due. This is becoming more common in newer systems. In more traditional systems or more manual environments, my experience is that you build a report, if you have that capability, to review all out of state purchases at the end of the month or quarter however you report. Determine which states you actually need to file in and you can tighten up the report even more to provide the actual tax liability calculation. In smaller volume locations I see many still copying the invoice and doing the process at month end.

Bob Scarborough
Title: CEO
Company: Tensoft, Inc.
(CEO, Tensoft, Inc.) |

Most mid tier to tier-1 ERP systems have some ability to do this built in. The challenge with those systems is the requirement to remember and to setup correctly to handle your reporting.

An option not mentioned yet are the best of breed providers for US Sales Tax. These systems maintain all of the required rules for all states, link to your financial system, automatically apply the appropriate tax rate, and handle your reporting. Sort of the systems option - outsourcing the tax rules, tables, application, and reporting without outsourcing the personnel actions.

Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Hi len,

Your problem sounds like mine. .. a business with limited invoices qualifying for use tax. We have between 10 and 20 each quarter. I find it more efficient to catch the invoice when its approved and accrue the use tax at point of data entry... I use Quick Books. I also scan a copy of each untaxed invoice at that time so I have a master file in the event of a sales tax audit. This makes it very easy to complete the quarterly sales and use tax return simply from the accrued tax balance, and I have the supporting documents filed by quarterly folder.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Folks
Helpful suggestions all, thank you! Given the scale of my client and the low volume, we are using a process centric approach-i.e. train and educate staff-because the technology approach would be overkill and no ROI.
Regards
Len

Topic Expert
Brenda Goudey
Title: CFO/VP of Finance
Company: KDR Designer Showrooms
(CFO/VP of Finance, KDR Designer Showrooms) |

My biggest use tax problem revolves around our credit card bills. I run reports listing transactions posted to the GL accounts which were selected for review during our last audit. It's easy to identify vendors paid thru A/P, but the majority of the invoices requiring use tax are for items purchased by one of the dozen folks with a company credit card. Consequently, the vendor listed on the report is usually CitiBank and then someone has to dig thru the hundreds of transactions/receipts to see if we paid tax. We tried catching them as the receipts were matched to the bill but that proved inefficient. It was faster just to do it at the end of the quarter.

It's a huge waste of time to eventually send the State of Missouri a check for only about $200.

Simon Westbrook
Title: CFO
Company: Aargo Inc.
( CFO, Aargo Inc.) |

Yes, but until you have reviewed all the credit card support, you don't actually know that the missing use tax liability is ONLY $200!!! Do you have employees complete expense forms for purchases they make on a company (or their) credit card. While I know there are some employees who cant be relied on to find a pair of matching socks, you could consider asking them to highlight any tax free purchases they might make on the credit card and post the items in a use tax analysis column on the report.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Simon
Your post made me think...just how non-value added is the Use tax tracking process for finance folk? Another example of a tax that needs a fix?? :)
Len

Jeff Taylor
Title: CFO
Company: Communications Co.
(CFO, Communications Co.) |

I could not agree more. The tax provides a tax on accounting departments saddled with tracking it.

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