Sales & Use Tax Compliance Engines:

The standard invoice provided that customers could inspect the delivered merchandise and request replacements from the taxpayer. Any claim for damages in transit was made by the taxpayer against the carrier, implying that title continued to be held by the taxpayer. The taxpayer also failed to establish that its customers had already paid sales or use taxes on some of the sales in question.

The taxpayer’s argument that it did not have substantial nexus with Wyoming for sales tax purposes was rejected. The taxpayer could not establish that its salesmen did not travel to Wyoming. Further, at all pertinent times, the taxpayer voluntarily held a Wyoming sales tax license and thus was authorized to collect taxes on behalf of Wyoming, which it did on some occasions. When it voluntarily applied for the license, the taxpayer established substantial nexus with the state and subjected itself to the requirements of Wyoming sales tax statutes. In effect, attempting to conscientiously fulfill tax jurisdiction requirements is part off what got this taxpayer in hot water.

As of May 1, nineteen states had filed petitions to initiate compliance with the guidelines of the Streamlined Sales Tax (SST) initiative. While SST appears to be poised for real-world implementation in the fall of 2005, recent introduction of a two-tiered membership with varying levels of compliance means the sales and use tax picture won’t be much clarified, simplified or indeed “streamlined” for quite some time. Even full enactment of the SST will not completely eliminate the complexity of situs and nexus decisions.

Compliance software also takes into account what the product is and how it will be used. Durable medical goods, for example, are taxed differently depending upon where they are sold, who is buying them, and how they will be used. The granularities of such decisions at times seem to defy common sense, keeping the tracking of taxability, as well as tax rates, a complex endeavor.

For example, in Virginia, a manufacturer’s sales of automated external heart defibrillators are exempt from Virginia sales and use tax as sales of prosthetic devices, if the defibrillators were purchased by or on behalf of an individual for their own use. When sales of the defibrillators are exempt, the manufacturer’s sales of training, support and man-agement services for the defibrillators are also exempt. However, when the defibrillators are not purchased by or on behalf of an individual, tax is imposed on the defibrillators and on charges for the services, even if the charges for services are separately stated on invoices.

IMPROVING THE AUDIT TRAIL
As tax rate and taxability decisions grow more complex rather than simpler, regulatory demands for transparency and auditability grow more intense. To provide the transparent, valid audit trails businesses need to maintain and prove compliance, their software must provide documentation for all of the decisions for every variable made along the way (even for things such as who will be using that defibrillator), so that any single transaction can be back-tracked, checked and verified. A sophisticated compliance engine can give a unified data set that integrates with all of their tax collection, calculation and payment steps rather than having audit trails separate from bookkeeping.

In addition to providing a verifiable audit trail, a compliance engine can also reduce chances of human error and system error. This is particularly important when a business’ accounting isn’t centralized and/or it has information coming in from a variety of locations. Multi-user, multi-site accounting systems are becoming more and more the norm as corporations acquire and move subsidiaries about. Absence, however, does not mitigate compliance needs. A compliance engine, however, can eliminate individual decision making at each location and allow the business to review records for any part of any transaction, no matter where it originated and ended.

A forms engine is a library of editable forms. While a forms engine saves time by eliminating manual entry, it does not provide a legitimate audit trail. With a forms engine, the tracks back to data collection are blurred and inadequately documented. A number is dropped into place on a form, but its source and the logic of the decisions behind the number’s calculation are not documented. A forms engine can also put a business in the position of correctly filling out and filing the wrong form — a source of headaches and a potential audit trigger.