Hidden Risks of Excise Tax Calculation Solutions for SAP
- May 18, 2016 | Gary Davis
Sometimes, a company will enter an agreement with an SAP-certified tax solution designed to handle sales and use tax. Then, when it's time to factor in excise taxes, the organization decides to build a custom calculator.
Problem is, what seems like a feasible solution at the outset is in fact brimming with risks. This is especially true within the highly regulated oil and gas industry, where the complicated nature of fuel excise tax can quickly overwhelm a system designed to handle far less tax complexity.
In this post, we'll look at four critical components of a custom excise tax module as well as the hidden risks associated with each.
First, there is the fragile issue of volume. While multiplying the per-volume excise tax rate by the amount sold might seem simple, this is rarely a straightforward calculation and your SAP solution will need to account for a number of possible scenarios.
This is because a gallon of fuel is rarely "just" a gallon of fuel. Each transaction could be taxed based on any one of three measurement types—net, gross or billed—depending on the state. For a calculation engine to be reliable it must be able to accurately determine which excise rates apply for each taxing jurisdiction.
For example, the volume may need to be converted to gross gallons in one state but net gallons for another. Even MORE confusing: Each of those conversions is based on a volume that has the potential to change significantly...if, say, the bulk fuel shrinks or contracts after being transported from a desert town in Arizona to a cold Colorado winter (or vice versa).
And if the fuel being transported is natural gas, matters may be further complicated by the ever-changing policies around Diesel Gallon Equivalent (DGE) and Gasoline Gallon Equivalent (GGE). For example, a July 2015 provision used these conversions to place natural gas on equal ground with diesel and gasoline—but only for liquified natural gas, and only at the federal level. To remain profitable, a custom solution will need to reflect these changes as well.
2. Supply Chains
Getting fuel excise tax right also means accounting for rates and requirements at every step in a lengthy supply chain —and each step is riddled with potential pitfalls. Tax treatments vary not only by product and taxing jurisdiction, but also how each jurisdiction approaches excise tax based on where the fuel is located. There's no simple, sweeping calculation that can be applied across an entire nation—or even within a single state, for that matter. An excise tax calculator will be dependable only when it's built to treat each individual transaction according to the highly specific rules, rates and reporting requirements of each individual tax authority.
A custom calculator will need to account for every possible scenario, from the 21 possible reporting schedules in Arkansas to continually evolving retail level taxes in states like Missouri.
3. Licenses and Exemptions
How do fuel licenses impact excise tax calculations in states where your company does business? What happens when a vendor is exempt from paying tax? These are highly important questions to answer when excise tax calculations are folded into an SAP solution designed for much simpler sales and use tax scenarios.
Each state has different licensing requirements for how fuel can be bought, sold, transported and taxed throughout the supply chain. Likewise, exemption certificates are common in motor fuel transactions and must be stored in a way that makes them easy to access during an audit.
This valuable compliance documentation will serve as proof under audit that the company has been making a good faith effort to play by the rules, no matter how complex they get. Yet many companies overlook this critical component when planning for custom builds. Unfortunately, building a solution strong enough to correctly calculate complex excise taxes will not save your company from a costly audit assessment if there's no plan to validate licensing status and tax-exempt transactions.
4. Local Jurisdiction Determination
As if all of this weren't complicated enough, there's also the delicate matter of location-based tax determinations. Even the most robust solution will increase audit risks when taxes are applied to the wrong jurisdictions—an error that can occur when address or zip code-based invoicing doesn't account for factors such as special tax districts and unincorporated areas.
Traditional methods for determining local jurisdictions can become especially problematic for companies that deal with residential sales, such as propane or heating oil distributors. These companies face the added complications of calculating sales tax on top of excise tax to file gross receipts taxes. In these instances, the only truly reliable way to pinpoint local tax jurisdictions and ensure proper rates are applied is to build geospatial data into your calculation engine. A GIS-powered platform will use exact latitude and longitude pairs to determine taxes for each transaction, significantly reducing audit liability and giving both vendors and customers the assurance of invoice accuracy.
Calculating both excise and sales and use tax within SAP is a fragile undertaking. A custom module will need to account for countless variables—from volumes and conversions to licenses and exemptions to GIS locations—at every step along the lengthy supply chain.
If you'd like to gain a better understanding of what calculating excise tax within SAP could look like, our free fuel excise tax calculator is a good place to get a preview. And if you haven't done so already, be sure to subscribe to the excise tax blog to be notified when the next post in this series is ready. Next, we'll be addressing the must-have components for ongoing maintenance.