How tax automation software can improve procure-to-pay

Do any of you remember The Six Million Dollar Man? Technology made astronaut Steve Austin “better than he was before. Better. Stronger. Faster.” The right technology can have a similar impact on your procure-to-pay processes.

If you’re reading this, you’re probably familiar with procure-to-pay. But here’s a quick review and/or introduction for the uninitiated. 

Procure-to-pay, also called purchase-to-pay or P2P, refers to the steps organizations take to source and purchase the goods and services needed to do business (aka, buy all the things). 

Whether your business makes hundreds or thousands of purchases each month, buying all the things typically entails identifying a need for goods or services, submitting a requisition, getting the request approved, sourcing suppliers/vendors, getting quotes, creating purchase orders, approving purchase orders, confirming the order fulfillment, reviewing invoices and resolving discrepancies, processing payment, and storing invoices/statements.

With so many moving parts, getting procure-to-pay right requires attention to detail, documentation, and superb organizational skills. Getting P2P wrong can lead to missed deadlines, increased costs, unhappy customers, and negative audit findings for your business. 

For example, make a mistake on a purchase order and it may not be approved in a timely manner. Miss a payment deadline and you could delay the order. It’s hard to fill your orders without all the parts, so your sales may be postponed, affecting your cash flow and upsetting customers. If you fail to scrutinize every invoice, you could pay more sales tax than you owe, or overlook or underestimate your use tax liability. Enter the negative audit findings. 

As a seller, you’re responsible for collecting and remitting applicable sales taxes and for validating exempt transactions by obtaining sales tax exemption certificates from your customers. But sales and use tax obligations don’t stay on one side of the counter: They play a part in procure-to-pay too. 

To reduce the likelihood of sales and use tax errors when purchasing goods and services for your company, it’s best practice to:

• Track and verify invoices 
  • Confirm sales tax was correctly charged
  • Confirm exemptions were applied as allowed
• Ensure vendors have up-to-date valid exemption certificates for your company
• Self-assess and pay consumer use tax

It’s a lot to manage. Fortunately, technology can make your P2P processes better, stronger, and faster. Read on to learn how.

As a buyer, you’re responsible for paying sales tax on taxable purchases unless you qualify for an exemption. If you don’t pay sales tax as required, you’ll be liable for consumer use tax instead. So, it’s important to check your invoices and confirm tax has been properly applied — or not, which would be appropriate for exempt transactions.

To do this, you need to understand which purchases are taxable and which qualify for a sales tax exemption. This can be harder than you might think, because taxability rules are all over the map.

For example, if you’re based in Washington state and buy bottled water and soda for the Tacoma office break room, you’ll likely owe tax on that water and soda because both are subject to Washington sales tax. But what if you purchase the same beverages for offices in California, where noneffervescent bottled water is exempt but effervescent bottled water and carbonated beverages are taxable? Or for your Dallas office? Unflavored bottled water is exempt from Texas sales tax, but soft drinks and flavored water are taxable. 

The answers to these questions depend on a host of factors, including taxability laws, sales tax sourcing rules, the location of first use, and even the method of delivery. 

It’s difficult if not impossible to manually verify every incoming invoice, but sales and use tax software can help. Avalara AvaTax for Accounts Payable automatically checks each invoice to jurisdiction rates and rules, enabling you to spot vendor errors early. It also allows you to identify trusted vendors — businesses with a history of charging you the right sales tax rate — so you can spare them extra review.

In addition to checking that sales tax is properly applied, you’ll want to make certain you take advantage of available sales tax exemptions, and that exempt transactions are backed by the necessary documentation. Confirming you weren’t charged sales tax on an exempt transaction is as important as verifying you were charged the proper amount of tax on taxable sales. Making sure your suppliers have an up-to-date exemption certificate is also critical.

Whenever you don’t pay sales tax on purchases of taxable goods and services, you’re required to give the vendor a valid sales tax exemption certificate or resale certificate. Vendors generally keep these documents on file, so you shouldn’t need to provide a certificate every time you buy from them.

However, it’s unwise to take a “set-it-and-forget-it” approach with exemption certificates. They’ll become invalid if some bit of information on them changes, and many certificates expire. 

Expiration dates for certificates typically vary by state as well as by type of certificate. Florida sales tax exemption certificates for governmental entities expire after five years, for instance, but Florida’s annual resale certificate for sales tax expires every year on December 31. Connecticut requires resale certificates to be renewed “at least every three years” from the date of issue.

It can be easy to lose track of exemption certificates and when they need to be updated — both when collecting and storing them for your customers, and when providing them to your suppliers. But keeping track of them is essential. There’s money at stake, as the George Washington University Hospital (GWUH) now knows all too well.

Here’s what happened. 

GWUH purchased prepared meals for resale from 2016 to 2019, paying nearly $1 million in sales taxes on the meals at the time. It later sought a refund for the tax paid, claiming they were paid in error because the purchased prepared meals were resold. 

At the time of purchase the hospital didn’t give the seller a certificate stating the meals were being purchased for resale. An easy oversight, really.

Washington, D.C., sales tax generally doesn’t apply to sales of personal property purchased for resale, but only when the proper procedure for claiming the exemption is followed. Per D.C. Code § 47-2010, sales of tangible personal property are subject to tax “until the contrary is established.” 

How to establish the contrary? The vendor must collect a certificate bearing the name, address, and registration number of the purchaser and certifying that the property was purchased for resale. The code specifies that “in case no certificate is furnished or obtained prior to the time the sale is consummated, the tax shall apply to the gross receipts therefrom as if the sale were made at retail.”

The last bit is particularly important, so I’ll repeat it with emphasis: “In case no certificate is furnished or obtained prior to the time the sale is consummated, the tax shall apply to the gross receipts therefrom as if the sale were made at retail.”

When GWUH sought a refund of the roughly $1 million in sales tax paid, the Office of Tax and Revenue (OTR) denied the claim because GWUH didn’t give the seller a resale certificate at the time of purchase as required by D.C. Code § 47-2010. Upon appeal, both the Superior Court and the District of Columbia Court of Appeals upheld the OTR’s decision. 

GWUH ended up liable for about $1 million in sales tax that it could have avoided paying, had it only provided the seller a resale certificate at the time of sale.

The right technology can help prevent such costly oversights. Avalara Vendor Exemption Management streamlines the creation and dispatch of exemption certificates for your vendors at scale. You select the location and reason for the exemption and it will guide you through the creation of the correct form, providing an extra layer of validation. Your vendors will then be able access the certificates. 

Avalara Vendor Exemption Management also simplifies document tracking and reporting, so you’ll know when certificates are expiring and need to be renewed. You can have it send an up-to-date certificate to every vendor that’s missing a certificate. Think of the headaches, money, and legal battles automating vendor certificate management could help curtail.

And Avalara Vendor Exemption Management Premium provides even more peace of mind. It includes gateway questions to help you determine whether an exemption is applicable to an intended purchase. This helps prevent improperly exempted purchases and improves consumer use tax management — another thorn in the side of many businesses.

Consumer use tax (or simply use tax) is a complement to sales tax, but unlike sales tax, it’s self-assessed. Businesses must determine when and how much use tax they owe and remit it to tax authorities. This makes use tax somewhat of a minefield and a common focus for auditors. Use tax mistakes happen. A lot.

Several different scenarios can trigger consumer use tax liability for a business, such as:

• The vendor lacks nexus and doesn’t collect sales tax
• The vendor mistakenly undercollects sales tax
• The buyer consumes inventory originally purchased tax free
• The buyer moves inventory to a different jurisdiction 

“Gotcha!” triggers abound with use tax. There are self-inflicted issues, such as general ledger (GL) accrual errors, failing to account for employee purchase cards, the movement of goods, or internal use of inventory. But you can also accrue use tax on work completed but not yet invoiced. And you can owe use tax on a zero-dollar invoice, or when a vendor doesn’t charge you tax on a taxable transaction or charges too low of a rate. 

Remember when we talked about the importance of verifying invoices? You don’t get a free pass on tax when a vendor fails to collect sales tax, reminds Eric Carrasco, Senior Product Marketing Manager for Avalara AvaTax for Accounts Payable and former Indirect Tax Manager at PM Business Advisors; you’re responsible for fixing the error and remitting the use tax due.

Here again, technology can help. Avalara AvaTax for Accounts Payable enables businesses to manage sales and use tax in real time. Using either batch uploads of purchase transactions or prebuilt integrations for APIs that provide direct integrations into many ERP and procurement systems, it identifies the overpayment and underpayment of sales tax on your purchases and applies the correct tax based on jurisdiction, taxability, and special rules. It also reconciles transactions and applies the use tax owed on your returns automatically, preventing the assessment of fines and fees.

Compliance regulations are moving targets, subject to constant change. And while sales and use tax compliance has always been a bear, it’s become even more burdensome for businesses due to economic nexus. 

Every state in the country with a general sales tax now has an economic nexus law requiring remote businesses to register for sales tax once their sales in the state reach a certain threshold — which can be as low as $100,000 in sales or 200 transactions in the current or previous year. That means more businesses than ever are responsible for collecting and remitting sales tax, validating exempt sales with the proper documentation, and paying use tax. 

Managing sales and use tax manually for as many as 45 states, the District of Columbia, and Puerto Rico has become untenable for many businesses. The risks of noncompliance are simply too high.

Enter Avalara, your Six Million Dollar Man end-to-end sales and use tax compliance solution. We cover both sides of the sales and use tax equation, sales and procurement, so that managing sales and use tax is, well, manageable. 

Learn more about our procure-to-pay solutions:

Avalara AvaTax for Accounts Payable: Manage use tax and sales tax with one platform.
Avalara Consumer Use Tax: Automate self-assessment of consumer use tax liability. 
Avalara Vendor Exemption Management: Send the right certificates to vendors at the right time.