Use Tax Pitfalls of Centralized Accounting for Manufacturers
In today’s economy, multi-location manufacturers are faced with the increased burden of cutting costs by choosing between centralized or decentralized accounting systems. Can a centralized system cost your company hundreds of thousands of use tax dollars?
Use tax oversights that we commonly find include not paying tax when tax is due (i.e. audit risk) or missing tax-saving opportunities (i.e. missed exemptions).
Combine these potential oversights with the fact that states are struggling with declining revenues and use tax is often under the microscope. This creates a new level of challenges for tax departments, especially in a centralized or shared-service environment.
Use Tax Pitfalls of Centralized Accounting:
1. Centralized AP Department Misses Details: If the Accounts Payable Department is far away from the plant, the staff often doesn’t have the opportunity to see firsthand the manufacturing process or the equipment and supplies used in the manufacturing process. The key to making correct use tax decisions is understanding what something is and how it is being used at the facility. Remove the tax decision maker from the plant and that knowledge becomes fuzzy at best.
2.Centralized Staff is Stretched Too Thin: Moving the tax decision process to a central location often results in increased responsibilities for staff. Managing different tax laws for different states can be an overwhelming task. Sales and use tax laws for manufacturers in one state can be complex, but add managing laws across multiple states and the complexity multiplies.
3. Local Staff Lacks Sales & Use Tax Training: Even in a shared environment, taxability decisions may be made at the plant level, usually by the purchasing department. They know the answers to the two essential questions (what something is and how it is being used) – but they don’t have the time or training to understand the specific sales and use tax laws for their state.
4. Localization Begets Communication Errors: If tax decisions are made at the local level -- for example by the purchasing department -- and they deem something taxable, make sure you can answer these questions:
- How is that information communicated to the AP clerk?
- What happens if the vendor doesn’t charge tax (for example with out-of-state suppliers)?
- How does use tax get paid?
- Is it APs responsibility to pay use tax?
- How and when are they going to know their responsibility?
On the flip side, what if the manufacturer purchases something that is exempt, but the supplier charges tax. Who is going to ensure tax doesn’t get paid?
Having a defined process where everyone understands their responsibilities, has the tools and information to do their job, and has access to a good resource for questions and consultation increases productivity.
While centralized functions could provide great benefit, without proper thought to use tax, the result could be the perfect storm. Make sure you fully understand the lifecycle of your use tax compliance – from procurement through payment to suppliers. And make sure your tax decision makers are trained on the specific tax laws in your state.