Why SALT (State and Local Tax) is a Savings Opportunity
A Realistic Snapshot
A day in accounts payable...
Liz works on the accounts payable staff of a large manufacturing company. Hundreds of invoices come to her every day because she is responsible for processing invoices issued by vendors with names that start with the letters A through M. Liz compares purchase orders to purchase invoices to check for quantity, price, and actual delivery. She codes the expenses to the appropriate accounts. Liz inputs the information into the computer system, produces the vendor payments, and files the invoices when she is done. In addition, Liz (1) produces reports when needed, (2) attends meetings and (3) changes her routine when mandated. Liz assumes the responsibility for her counterpart on occasion.
A day in the tax department...
Laura ensures that the company is in compliance with state sales and use tax rules. The company operates in several jurisdictions so she must understand and research the tax rules in each applicable state. She prepares the sales tax returns and makes sure that all funds are remitted to appropriate state taxing authorities in a timely manner. In addition, Laura reviews transactions that exceed the company materiality level ($200,000) to ensure state tax exemptions are maximized.
Money is slipping through company fingers...
Laura and other people in the state tax department, if there is a state tax department, scrutinize transactions that are valued at $200,000 and over. Who is looking at the state tax consequences of transactions valued at less than $200,000? Each transaction should be reviewed with an eye to:
- Is each component of the purchase taxable or exempt?
- If an item or service is taxable, what is the right tax rate?
- If an item or service is exempt, why?
- Are all available tax exemptions secured and appropriately documented?
There are several reasons that the state sales and use tax area represents an opportunity to recover money buried in "immaterial" expenses:
- There are at least 5 different sources of state sales/use tax law. The typical accounts payable staff has neither the time nor inclination to regularly check all sources.
- Materiality thresholds and sheer transaction volumes dictate that most small dollar value transactions are not scrutinized.
- Small dollar value transactions usually represent large expenditures at the end of the day.
- When in doubt about whether to charge tax, most vendors tax customers at the highest rate and remit collected funds to the state. This ensures that the vendor will not get an unexpected tax bill if or when they are audited.
The end of the rainbow...
Most large companies have an apparatus to deal with SALT because they know that sales or use tax expenses that can range between 4%- 10% of the cost of purchases can be material. It hurts nothing to have someone review transactions to determine if savings are available. The great thing about outsourcing a review is that the accounting staff continues to process current transactions while any savings or refunds are retrieved by a third party. Large companies with savvy leadership do have state tax departments and third party consultants look for state tax savings. I suggest that mid-sized and small companies should follow their example if possible.
