Avalara AvaTax for Accounts Payable brings new consumer use tax compliance capabilities
Use tax is often overshadowed by its better-known counterpart, sales tax. It can be easy to overlook the distinction and think of them as the same thing. However, any business that’s undergone a sales and use tax audit can tell you they are different and mistakes in how you manage both can be costly.
A business can be sales tax compliant, meaning it’s compliant with state regulations around the tax it collects from sales then remits to the governing authorities. Compliance for use tax is another matter. Before we jump into the specifics, let’s first define use tax.
Use tax is an indirect tax levied on the use, storage, or consumption of tangible personal property or services, and is paid for by the purchaser. In other words, while a business can collect and remit tax accurately based on its sales, the business still needs to do the same for its purchases. You can learn more about the differences with our post Use tax vs. sales tax: What you need to know.
States place equal responsibility on compliance for sales and for purchases. Just because your vendor failed to collect tax from your purchase doesn’t mean you aren’t responsible for fixing that error and remitting the tax you originally owed.
What does consumer use tax mean for small and midsize businesses?
While managing use tax is something most businesses have to do, it can be particularly challenging for small and midsize businesses. Some might overlook or mismanage their use tax obligations because of a lack of awareness and/or not having dedicated finance personnel dedicated to it.
For example, a manufacturer failing to understand the tax regulation complexities around their purchasing and exemptions can find themselves with years of exposure. This can consist of back taxes owed as well as interest and penalties that can increase liability to two times or more of the original tax owed. In addition, that manufacturer could experience frequent audits from multiple states moving forward.
Enterprise businesses also have complex consumer use tax requirements
Major enterprises face multifaceted challenges related to use tax that can significantly impact various aspects of their procure-to-pay processes. For example, a company with a complex global supply chain sources components and raw materials from multiple countries, each with its own set of tax regulations. Ensuring compliance across diverse jurisdictions requires intricate logistics and operational coordination. From a tax perspective, the enterprise must contend with the challenge of determining the appropriate tax rates and rules for each jurisdiction where it operates as well as where and how their purchases were ultimately used and consumed.
Without the right systems and processes in place, underpayments and overpayments are inevitable, and both have financial implications and inherent risk. This scenario is just one of many examples of how complicated managing use tax can be and it highlights the importance of leveraging technology built to address the complexity.
On the technical front, an enterprise dealing with global operations faces the challenge of integrating tax compliance into its many system platforms, including its enterprise resource planning (ERP) systems. Ensuring these systems can accurately calculate and track use tax liabilities for transactions occurring in different countries requires sophisticated technology solutions.
The enterprise may need to invest in specialized software and tools capable of handling the intricacies of international tax regulations. Additionally, maintaining the agility of these systems to adapt to changes in tax laws is crucial and requires continuous updates and monitoring.
Introducing Avalara AvaTax for Accounts Payable
AvaTax for Accounts Payable empowers businesses to use prebuilt integrations or APIs for real-time management of use tax on their purchases, ensuring compliance with use tax regulations. The following is a brief overview of what the solution provides.
Seamless integration with ERP systems: AvaTax for Accounts Payable is designed to address the technological complexities in procure-to-pay systems by providing direct integrations into many popular ERP and procurement systems through prebuilt integrations or APIs. Through these integrations, the solution can take transaction information from a company’s accounts payable system and provide real-time use tax calculations, thereby reducing the time it takes for businesses to fulfill their use tax obligations.
Centralized compliance and control: Businesses can manage their compliance for sales and use tax all in one platform with AvaTax. Through a centralized system, businesses can be audit ready with a history of every decision across sales and purchases. All tax rules, configurations, and determinations are managed on the AvaTax platform. There’s no need to rely on complicated or customized integrations for use tax determinations.
Capture overpayments and underpayments from vendors: With AvaTax for Accounts Payable, businesses are given the tools to identify and take action on overpayments and underpayments of tax from vendors. In addition, they can use AvaTax for Accounts Payable to manage their vendors and assign rules to automate the use tax review process. Users of Avalara Vendor Exemption Management get the added bonus of being able to provide vendors with their exemption certificates.
How AvaTax for Accounts Payable works
By leveraging prebuilt integrations or APIs, businesses can connect to their procurement or accounts payable system. Alternatively, batch uploads of purchase transactions is also an option. Businesses can use our standard templates or create and manage their own templates.
Once integrated, AvaTax for Accounts Payable makes several determinations based on the use tax configurations managed on AvaTax. This includes ignoring transactions that fall below predetermined thresholds, accepting certain variances, and applying rules based on vendors, cost centers, products, and multiple point-of-use allocations. Use tax is calculated and auto-accrual is completed.
The next step is to review transactions that are not auto-accrued or ignored and make determinations to confirm variances or edit and allocate the correct tax.
Underpayments work just the same as with sales tax; the calculated amount can be added to the return and submitted to the state. Overpayments can be tracked and reported leaving businesses with the option of pursuing credits directly with their vendors. Integrated systems provide reconciliation back to the general ledger.
Frequently asked questions:
Can AvaTax for Accounts Payable integrate with any system?
- AvaTax for Accounts Payable can integrate with any system provided we support the integration through our prebuilt integrations or the system allows for an API integration. This solution provides seamless integration with ERP and procurement systems for efficient use of tax calculations and also supports batch uploads of transactions.
How does AvaTax for Accounts Payable centralize compliance and control for businesses?
- The platform allows businesses to manage both sales and use tax compliance on a single centralized system. AvaTax maintains a comprehensive history of decisions related to sales and purchases, ensuring businesses are audit ready. All tax rules, configurations, and determinations are conveniently managed within the AvaTax platform, eliminating the need for complex integrations to produce use tax determinations.
How does AvaTax for Accounts Payable handle transactions and make use tax determinations?
- The platform makes use tax determinations based on configurations within AvaTax, handling transactions below predetermined thresholds, accepting specified variances, and applying rules based on vendors, cost centers, products, and multiple point-of-use allocations.
What steps are involved in the workflow of AvaTax for Accounts Payable?
- After integration, AvaTax performs auto-accrual and calculations for use tax. The next step involves reviewing transactions not auto-accrued or ignored, making determinations to confirm variances or editing and allocating the correct tax. The process for managing any underpayments works the same as with sales tax; the calculated amount can be added to the return and submitted to the state. Overpayments are tracked and reported, offering users the option to pursue credits with vendors. Integrated systems ensure reconciliation back to the general ledger.
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