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Sales Tax Compliance in the Oil and Gas Industry

Avalara

“Blood may be thicker than water, but oil is thicker than both.” -J.R. Ewing, Dallas

In the highly regulated oil and gas industry, most executives are no stranger to the costs of compliance. Whether in response to emergencies (Deepwater Horizon, Pemex Pipeline explosion), or the resulting political pressure, national and international regulators keep close watch over the health, safety, and economic implications of the industry.

Sales tax

Tougher regulations and greater scrutiny extend to sales tax compliance as well. Managing changing sales tax rates, sourcing rules, and boundary changes becomes more complex as distributors expand into new markets.

In the US, state and local taxes can be a significant cost of doing business onshore or in state waters. Each state has its own tax statute. The details of the various state requirements are numerous, and require expertise beyond the scope of most oil and gas companies. (Ernst and Young)

Managing compliance within an ERP

Companies of all sizes turn to Enterprise Resource Planning (ERP) systems to manage various aspects of compliance, centralize and streamline processes, and increase efficiencies. ERPs allow oil and gas companies to access and oversee important documentation–such as drilling rights–in order to minimize risk and ensure regulatory compliance. Correctly handling sales tax within the ERP is trickier than it seems. And sales tax errors, one of the lesser-known drains on a company’s resources, are a source of audit risk.

An ERP system allows companies to create a centralized source of data on everything from customer contacts to inventory to invoicing. Sales tax is often an afterthought. It doesn’t have to be.

Oil and gas related activities Associated tax risksAutomated tax solution
Refining and distributing crude oil. > Charging sales tax on the wrong location.
> Incorrectly assigning sales tax rates.
> Over- or under-charging sales tax.
> VAT considerations include knowing rules regarding principal supplies and imports.
> Determines which entity has jurisdiction over a transaction.
> Assigns the right sales tax rate to each transaction.
> Calculates VAT rates where appropriate.
Drilling rights and leases; fracking> Assuming leases are not subject to sales tax.
> VAT risks include determining environmental offset charges, VAT on drilling rights, and transfer of rights.
> Identifies relevant jurisdiction.
> Assigns the correct sales tax rate according to jurisdictional boundaries.
Pipeline transportation and energy storage> Which rules apply depends on where an item is purchased and where shipped
> For multi-state projects, this can be complex and error-prone.
> VAT and taxation of transportation and maintenance.
> Automates product taxability data.
> Multi-state jurisdictional analysis and application of correct rules and rates.
> Applies global taxability rules to products and services.
National and multi-national oil companies> Tracking multi-jurisdictional sales tax rates and rules can be a huge resource drain for companies.
> For those doing business overseas, matters are more complex.
> Assigning the wrong jurisdiction to a transaction.
> Charging the wrong rate.
> VAT: Not knowing the relevant country’s rules about oil and gas industry related taxation.
> Automates product taxability.
> Assigns correct rates, rules, and boundaries.
> Identifies multi-national company tax obligations.
> Applies global taxability rules to products and services.
Exploration and production> Charging the wrong rate.
> Remitting and reporting to the wrong jurisdiction.
> Not understanding which services are subject to sales tax.
> Miscalculating VAT charges on exploration and production, as well as VAT.
> Applies correct rules and rates to applicable transactions.
> Applies global taxability rules to products and services.

An automated and scalable sales and VAT tax solution within your ERP                                                 

As companies grow, compliance efforts must be scalable to accommodate that growth or any other change. Making compliance a scalable process requires imbedding controls and accountability for compliance throughout the organization. (Ernst and Young)

Managing sales tax complexities inherent in the oil and gas industry can be streamlined and automated within your existing ERP. Mitigating sales tax risks at various stages of exploration, drilling, production, and delivery requires an automated, updated, integrated sales tax management system. After all, even though regulations within the oil and gas industry are complex, sales tax doesn’t have to be.

Want to automate sales tax within your ERP? Call Avalara today.

(877) 780-4848

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