From sales and use tax dysfunction to strategic opportunity
RSM transforms a client’s sales and use tax efforts
Sales and use taxes average 7 percent of most companies’ sales, yet they are often treated as an afterthought. By clarifying strategy, streamlining processes and integrating technology, RSM helped one client save taxes, time and money, today and into the future.
When RSM was asked to assess the sales and use tax department for a $400 million manufacturing and service company with operations in more than 20 states, we found wide-spread dysfunction. Decisions affecting state and local tax filing and collection were being made by personnel spread through the company, many without the necessary training. Processes followed by the various departments involved were ad hoc and often undocumented. The company could not timely collect accurate data to file returns, and consequently, more than 1,000 state and local tax returns were being prepared manually each year.
The result? The company faced numerous open audits and multiple multi-million dollar assessments with additional penalties and interest and was considering expensive voluntary disclosures in numerous markets.
We didn’t just look at their current compliance situation, however. We examined the underlying people, process, technology and strategy issues that led to it. This led to one key finding: the tax department was spending 70 percent of its time on compliance, 12 percent of its time on exams and 16 percent of its time on various other administrative issues. That left 2 percent of its time for strategic planning. Without time to proactively analyze its current state and make the necessary changes to address the issues, the company’s sales and use tax problems would only get worse.
Better processes for better results
With this client, our first step was to examine the current sales and use tax process. We found far too many tax accrual decisions being made outside of the tax department by personnel with no tax training. Because virtually all of the sales and use tax work was performed manually, there was no overarching system in place to put the brakes on bad decisions. This not only led to significant audit issues, it was also tremendously inefficient. The company was spending more than $200,000 in payroll annually on 7,000 hours of non-tax department time spent making tax accrual decisions.
Our solution started with a thorough examination of all parts of the company touching the sales and use tax effort. We identified every area that touched the process, the information needed from each and the systems and processes that generated the information. Then, we:
- Redesigned sales and use tax processes to automate where appropriate, confine tax accrual and other tax decisions to the tax department, free up time among non-tax department personnel to focus on their assigned duties, and streamline the compliance process so that the tax department had adequate time for planning, training and other strategic initiatives
- Conducted a nexus study to ensure that the company was filing in all locations where it had a taxable connection – and that it was not paying taxes to jurisdictions where it did not owe
- Performed a reverse audit to identify and recoup past overpayments
- Recommended and assisted with voluntary disclosures in key jurisdictions to mitigate the effect of past compliance failures
Through the sales and use tax process redesign, we streamlined workflows across the company to help ensure that the right information was collected by the right parties, that tax accrual decisions were made only by trained tax department personnel, and that returns were prepared and filed timely, accurately and by the appropriate parties
Automation to increase efficiency and accuracy
With the right design in place, the next step was implementing better technology. By integrating a third-party package with the client’s ERP system, we were able to automate most accrual decisions, return preparation and return filing. We also helped the client document the processes necessary to keep the system updated to reflect changes in:
- Laws, regulations and rates by all appropriate jurisdictions
- The company’s prices, products and services that would affect sales and use taxes
- Its customers and their locations
The combination of streamlined processes and improved technology cut in half the time the tax department spent on compliance, from 70 percent of sales and use tax hours to 35 percent, while also helping ensure the accuracy and timeliness of all sales and use tax returns.
There was a silver lining associated with the client’s previously dysfunctional sales and use tax efforts. Whenever we see processes that result in sales and use tax underpayments, we usually find overpayments as well. Our reverse audit identified significant overpayments, the recovery of which helped pay much of the cost of the sales and use tax redesign effort.
The bottom line impact of this project was significant and lasting:
- A reduction in overall sales and use tax liabilities
- A 50 percent reduction in time spent on sales and use tax compliance
- $200,000 in annual payroll and 7,000 hours a year in non-tax department time freed up for other uses
- A significant increase in time the tax department could spend on strategic planning
Sales and use taxes too often ignored
Unfortunately, this situation is not unusual. We often find that companies treat sales and use tax efforts as a formality. They are not. They are complex business challenges with a direct impact on your bottom line. There are more than 7,500 sales and use taxing jurisdictions nationwide and more than 10,000 different sales and use tax rates. The average overall sales and use tax cost for most companies is about seven percent of total sales. That’s an impact that no company can afford to ignore.
The complexity does not end there. Decisions made by personnel in multiple functions across your company, as well as data generated by those functions, directly affect your sales and use tax efforts. Accounts payable, accounts receivable, order entry, sales and marketing, cost accounting, IT – all these areas must work in concert to keep your compliance efforts on track to ensure that you don’t end up compounding the sales and use taxes you owe with additional penalties and interest. And so that you don’t overpay by missing planning opportunities