Procurement Cards and Tax Compliance: Bridging the Gap
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Procurement Cards
and Tax Compliance:
Bridging the Gap
A Report of the Steering Committee
Task Force on EDI Audit and Legal Issues
for Tax Administration
Federation of Tax Administrators
444 North Capitol Street, NW - Suite 348
Washington, D.C. 20001
Telephone: (202) 624-5890CONTRIBUTING ORGANIZATIONS Federation of Tax Administrators 444 North Capitol Street, NW, Suite 348 Washington, DC 20001 Telephone: 202/624-5890 Telefax: 202/624-7888 Committee On State Taxation 122 C Street, NW, Suite 330 Washington, DC 20001-2109 Telephone: 202/484-5222 Telefax: 202/484-5229 Institute of Property Taxation One Capital City Plaza 3350 Peachtree Road, NE, Suite 280 Atlanta, GA 30326 Telephone: 404/240-2300 Telefax: 404/240-2315 Multistate Tax Commission 444 North Capitol Street, NW, Suite 425 Washington, DC 20001 Telephone: 202/624-8699 Telefax: 202/624-8819 Tax Executives Institute 1001 Pennsylvania Avenue, NW, Suite 320 Washington, DC 20004-2505 Telephone: 202/638-5601 Telefax: 202/638-5607
FOREWORD
The Task Force on EDI Audit and Legal Issues for Tax Administration (Task Force) was
formed to coordinate efforts between the business community and tax administrators in ana-
lyzing and addressing the issues posed for tax administration by electronic data interchange
and related business processes. The Task Force is comprised of representatives of the Commit-
tee On State Taxation (COST), Institute of Property Taxation (IPT), Tax Executives Institute (TEI),
Multistate Tax Commission (MTC), and Federation of Tax Administrators (FTA), and commis-
sioners from several state tax administration agencies. This report is the third in a series of
reports to be published by the Task Force on electronic commerce and tax administration.
Through the Task Force process, the Electronic Business Processes work group was formed to
examine the tax administration and compliance issues associated with certain emerging busi-
ness processes, including the use of corporate procurement cards. A large group of taxpayer
representatives and tax administrators as well as representatives of procurement card issuers
gave freely of their time and effort to understand the issues involved and to identify approaches
which would meet the needs of both taxpayers and tax administration agencies and which
were still reflective of reality in the procurement card field.
This report is the product of that effort. It contains a description of procurement card opera-
tions and benefits and identifies the primary sales and use tax administration and compliance
issues involved with their use. It examines current practices among card users and tax agencies
with respect to procurement cards and concludes by providing a series of recommendations for
businesses using procurement cards, tax agencies, card issuers and vendors accepting procure-
ment cards that are intended to address the tax administration issues raised by procurement
cards. As with the report itself, the recommendations are premised on a need for all parties to
work together to resolve the issues.
The Steering Committee wishes to acknowledge the contributions of all individuals who
devoted their time and effort in developing and refining this report. A complete listing of
participants is in the Appendix.
Stanley R. Arnold, Steering Committee Chair
Commissioner, New Hampshire Department of Revenue Administration
June 1997CONTENTS
Introduction ................................................................................................................................. 1
Procurement Card Operations.................................................................................................. 1
Mechanics of the Cards ................................................................................................... 1
Procurement Card Benefits............................................................................................. 2
Tax Compliance Issues............................................................................................................... 3
Information and Documentation Required ................................................................. 3
Information Currently Provided on Procurement Card Purchases ......................... 4
Current Card User Practices for Verifying Sales and Use Tax
Accrual or Payment .............................................................................................................. 6
Manual Review and Verification ................................................................................... 6
Estimation Methods ........................................................................................................ 6
Combination Approaches............................................................................................... 8
Current State Practices for Verification of Sales and Use Tax
Accrual or Payment .............................................................................................................. 9
Taxpayer Rulings ............................................................................................................. 9
Audit Practices ............................................................................................................... 10
Task Force Recommendations ................................................................................................ 11
Recommendations to Procurement Card Users ........................................................ 11
Recommendations to Vendors/Suppliers .................................................................. 12
Recommendations to State Tax Authorities ............................................................... 13
Recommendations to Card-Issuing Entities .............................................................. 15
Conclusion ................................................................................................................................. 16
Appendix ................................................................................................................................... 21PROCUREMENT CARDS AND TAX COMPLIANCE:
BRIDGING THE GAP
A Report of the Steering Committee
Task Force on EDI Audit and Legal Issues for Tax Administration
Introduction ers and state tax agencies have taken to ad-
dress these issues; and (4) recommend certain
U.S. businesses are expanding rapidly the actions to taxpayers, tax administration agen-
use of “corporate procurement cards” or “pro- cies, vendors/suppliers and procurement
curement cards” in purchasing goods and card issuers that will be helpful in address-
services for their own use and consumption.1 ing the administration and compliance issues
Procurement card programs can be effective in a fashion which meets the needs of all par-
in reducing substantially the costs associated ties.
with such purchases when compared to tra-
ditional purchasing practices. They do, how- Procurement Card Operations
ever, raise certain tax compliance and admin-
istration issues for both taxpayers and tax Mechanics of the Cards. At the most ba-
administration agencies. These issues largely sic level, procurement card programs replace
revolve around the availability of adequate the various steps in the traditional purchas-
information to document that the appropri- ing process (a requisition, followed by a pur-
ate amount of sales or use tax was paid on chase order, followed by an invoice, followed
purchases made with procurement cards. by approval of the invoice, followed by a pay-
Developing adequate procedures to address ment to the vendor) with an authorization to
these issues and to prevent tax documenta- an employee to use a charge card to procure
tion procedures from hindering the imple- necessary goods and services. Procurement
mentation of procurement card programs will cards are corporate charge cards issued to
require cooperation among all parties in- specific employees of a business after that
volved — taxpayers, tax administration agen- business enters into a contract with a card is-
cies and procurement card issuers. suer involving use of the card, financial re-
sponsibility, billing, payment, etc.3 The user
The Task Force on EDI Audit and Legal company designates the employees autho-
Issues for Tax Administration2 has developed rized to use the cards for making necessary
this “White Paper” with four objectives in business expenditures and places any trans-
mind: (1) improve the understanding of pro- action limits or use restrictions on the cards
curement card programs and their operations; and employees. Limits may be placed on
(2) identify and analyze the tax administra- transaction size, types of purchases, vendors
tion and compliance issues associated with which may be used and the like. These limi-
such programs; (3) review steps that taxpay- tations will vary from company to company
1Procurement Cards and Tax Compliance
depending on a variety of factors, including Procurement cards are used by companies
the nature of their operations, their business to purchase a wide variety of goods and ser-
needs, legal requirements, and the extent to vices necessary to their operation.8 Tradition-
which they want to replace traditional pur- ally, procurement card programs have fo-
chasing operations with procurement cards. cused on “high volume/low dollar” transac-
tions which account for a large proportion (by
At the point of sale, the procurement card number) of an enterprise’s purchase transac-
transaction operates identically to a tradi- tions, but a relatively small amount of the pur-
tional charge card transaction. In an “over- chasing volume (by dollar) and would, there-
the-counter” transaction, the card user pre- fore, have relatively high “per transaction”
sents the card — in lieu of cash, check or pur- costs under the traditional purchasing pro-
chase order on account — and then signs and cess. As the programs become more widely
receives some form of documentation of the used and accepted, however, the types of
transaction.4 A substantial portion of procure- purchases for which they are utilized continue
ment card transactions are telephone trans- to expand, depending on the business needs
actions where the card user provides the card and desires of the user company.
number to the vendor, and the goods and ac-
companying documentation are shipped ac- Procurement Card Benefits. Procurement
cording to the customer’s instructions. 5 card programs can substantially reduce the
costs of purchasing operations, particularly
Payment to the vendor is made by the card for “high volume/low dollar” transactions.
issuer or merchant processor6 in accordance One source 9 estimates that 60 percent of all
with contract terms between those parties. the individual purchases in medium to large
The issuer, in turn, receives payment from the companies average less than $500 in value
company of the card user. Card issuers bill and that 30 percent of these purchases are less
the user companies on a periodic basis, and a than $100 per transaction. Collectively, pur-
single, centralized billing and payment is chases of less than $100 may account for less
made for all transactions made by all indi- than 5 percent of the total dollar-volume of
vidual card users in the company. Procure- company purchases, yet the fixed internal
ment cards differ from company-sponsored processing costs of these transactions can be
“travel and entertainment” (T&E) cards $120-150 each, regardless of the value of the
where the individual card user is typically item purchased. A procurement card pro-
responsible for payment. gram can save as much as 35-40 percent on
overall internal purchasing costs.10
Card issuers also provide a variety of pe-
riodic information statements on procure- These dollar savings are achieved in a
ment card transactions to the users, most com- number of ways. Purchasing lead time is re-
monly on a monthly basis.7 These statements duced by avoiding involvement of purchas-
may be issued to individual card users, indi- ing and accounts payable staff and avoiding
vidual plant locations or departments, or on the costly and time-consuming paperwork of
a company-wide basis. They may include the requisitions and purchase orders. Also elimi-
transactions of several individual card users nated is the need to deal with multiple in-
or all users in a company. Statements may be voices and multiple vendors in a single-payment
provided in paper or electronic form. cycle. In short, procurement cards can effec-
2Procurement Cards and Tax Compliance
tively simplify and streamline the procure-
ment process and allow a business to shift The tax compliance issues addressed in
resources previously devoted to paper pro- this white paper relate primarily (if not
cessing and control to other more “value- exclusively) to sales and use taxes. Hence,
added” tasks. In addition, suppliers or ven- federal information reporting rules relat-
dors which accept procurement cards also ing to the issuance of Form 1099 will pose
benefit from reduced paperwork and more additional compliance issues, including,
rapid payment. for example, identifying service provid-
ers (as opposed to providers of goods),
identifying the form of organization of the
Tax Compliance Issues provider (whether corporate or indi-
vidual), and aggregation of purchases to
In general terms, the primary tax compli- determine whether reporting thresholds
ance and administration issue raised by the are exceeded. In addition, federal and
use of procurement cards — for taxpayers and state income or excise tax rules pose ad-
tax administration agencies alike — is this: ditional compliance challenges. For ex-
ample, taxpayers must ensure that the
Whether the information provided to card procurement cards engender sufficient
users on the periodic statements from the information (or the use of the card is so
card issuer regarding purchases made narrowly circumscribed as) to establish a
with procurement cards is sufficient to right to a deduction for ordinary and nec-
document that the correct amount of state essary business expenses. Such issues are
and local sales or use tax was collected on
beyond the scope of this paper.
the transaction at the time of sale.
For the taxpayer, who is responsible un-
der state law and regulation for document- cies. The traditional paper documentation on
ing that the appropriate tax has been paid, which they both rely to determine compliance
the issues become: (1) identifying the steps — the detailed, paper invoice — is no longer
that should be taken to ensure that the ap- a key part of the purchasing process. The
propriate tax has either been paid to the ven- most readily available substitute — the peri-
dor or self-accrued and remitted to the state; odic card issuer report or statement — does
and (2) determining what documentation can not generally provide the requisite level of
be provided to the state tax auditor to dem- detail to provide a complete “tax picture” for
onstrate that payment has been made.11 For each procurement card transaction.
the state tax auditor, the issue becomes what
documentation or procedures are to be relied Information and Documentation Re-
upon to determine that the appropriate tax quired. The information and documentation
has been paid to the vendor or accrued and requirements that taxpayers must meet for
paid to the state by the user to avoid a situa- transactions involving procurement cards are
tion in which additional tax may be assessed generally consistent with the recordkeeping
solely because of inadequate information. standards contained in the Model Record-
keeping and Retention Regulation (Model
The concern is essentially identical for Regulation) developed earlier by the Task
both taxpayers and tax administration agen- Force.12
3Procurement Cards and Tax Compliance
Section 3.1 of the Model Regulation states: Unit and total price of item or product
purchased
A taxpayer shall maintain all records that Indicator of taxability or non-taxability of
are necessary to a determination of the item
correct tax liability under [insert appropri- Description of any associated services (e.g.,
ate citations to state tax statutes]. All re- freight, shipping, handling, warranty,
quired records must be made available on installation, maintenance, etc.)
request by the [state taxing authority] or its
Charges for associated services
authorized representatives as provided
for in [insert appropriate citations to state tax Amounts of any discounts
statutes]. Such records shall include, but Amount of tax paid or accrued
not be necessarily limited to: Certificate (resale or exemption) on file/
type, number and effective date
[Insert elements of state law which require Link to purchaser’s accounting records
certain records to be retained (e.g., books of
account, invoices, sales receipts), or specific The Model Regulation specifically ad-
tax elements or transactions (e.g., credits, ex- dresses procurement card transactions and
emptions etc.) for which particular records periodic statements in Section 9.3:
may be required.]
Hard-copy records generated at the time
The specific elements that states normally
of a transaction using a credit or debit card
require in transactional records are not listed must be retained unless all the details nec-
in the Model Regulation to allow for variances essary to determine correct tax liability re-
among state laws and tax structures. In gen- lating to the transaction are subsequently
eral terms, the information required is that received and retained by the taxpayer in
necessary to determine the parties to the accordance with this regulation.13 Such
transaction, the date of the transaction, the details include those listed in subsection
goods and services purchased, the unit and 4.2.114 [Footnotes not in original.]
total price, the destination, and the tax paid
or charged. In “traditional” transactions, such In short, the recordkeeping and documen-
information is normally contained on the in- tation standards for procurement card trans-
voice provided by the seller to the purchaser. actions are the same as for other transactions
The data elements provided (and required for that would normally involve a paper invoice.
a correct determination of tax) will depend Where the periodic statement from the card
on the nature of the transaction. Those ele- issuer contains the required detail, the trans-
ments usually provided include the follow- action-level, paper records generated at the
ing, although not all elements may be neces- point-of-sale need not be retained under the
sary at all times: Model Regulation.15
Seller’s name and location Information Currently Provided on Pro-
Purchaser’s name and location curement Card Purchases. Capturing the
Transaction date detailed information identified above on pro-
Ship to location (with specificity) or FOB curement card transactions requires one of
point two approaches: (1) The vendor must utilize
Item or product description and quantity special procurement card equipment and
purchased separately enter the required information at
4Procurement Cards and Tax Compliance
the point-of-sale (or at the time a phone or- and local combined) charged on the
der is placed); or (2) A computer interface transaction, the postal Zip Code of the
must be developed to extract the data from address to which the goods were
the vendor’s point-of-sale system (where the shipped (if not delivered at the point-
required information is likely to be captured of-sale), and some minimal or generic
through product numbers, UPC codes, etc.) product description based on cus-
and to pass it to the processing system of the tomer-defined codes.
card issuer where it can subsequently be pro- • Where more sophisticated procure-
vided in reports to card users. ment card equipment is used at the
point-of-sale or the requisite computer
Presently, the equipment and technology interface has been developed, all, or
that is necessary to capture the transaction- much, of the information which is re-
level detail is not commonplace among ven- quired for tax compliance can be pro-
dors. Instead, procurement card transactions vided on the periodic statements, if it
are generally processed using three different is entered by the vendor or is other-
types of systems: (1) customary retail credit wise available from the vendor’s
or charge card systems; (2) intermediate-level point-of-sale system and is passed to
systems; and (3) systems in which all the re- the card issuer.
quired information is captured and subse-
quently provided to the card user. No reliable information exists regarding
the proportion of total procurement card
As a result, the type of information provided transactions which fall into each of the above
to card users depends on the system in place. categories. The consensus among represen-
tatives of card issuers and user companies
• Most procurement card transactions who participated in the Working Group de-
are processed through customary re- liberations is that the large majority of trans-
tail charge card point-of-sale equip- actions are accompanied only by minimal in-
ment, and the information provided on formation either because the technology used
the card issuer statement is generally is not sufficient to capture all the required data
comparable to that provided on an in- or because the vendor does not input the data
dividual charge card statement. It will correctly despite having the technology. The
include only an identification of the intermediate-level technology is being used
purchaser, identification of the seller, for a growing volume of transactions.16 Sys-
and the total purchase price, includ- tems capturing the complete information set
ing any tax that was charged. are by far the least common.
• Procurement card transactions may
also be processed using an intermedi- This is not at all surprising, given that pro-
ate-level of special procurement card viding increased detail generally requires an
equipment at the point-of-sale which investment in equipment by the vendor as
allows some, but not all, of the detailed well as additional time and expense to input
information to be captured if it is en- the information at the time of the sale. Like-
tered by the vendor. The additional wise, building computer interfaces for what
information (beyond that above) in- is undoubtedly a wide range of point-of-sale
cludes the amount of sales tax (state systems is a complex undertaking.
5Procurement Cards and Tax Compliance
It is the norm then, in today’s environ- Management may be far more knowledge-
ment, that the transaction-level data provided able about and interested in the cost savings
to card users on procurement card transac- derived from the procurement and accounts
tions is insufficient to document that the ap- payable processes than about the sales and
propriate state and local sales or use tax has use tax issues inherent in procurement card
been paid on the transaction. For transactions programs. Consequently, it falls primarily to
where only the minimal information is cap- the company’s tax department to devise a
tured at the point-of-sale, there is no tax-re- way to deal with those tax issues. Experience
lated information provided. Where the in- among users indicates that the ability of a
termediate detail is provided, the documen- company to properly account for and accrue
tation will still be lacking complete product tax is heavily dependent on the involvement
descriptions, breakdowns of state and local of the tax department in setting up the pro-
tax charged, ancillary service information, gram, defining the type of information to be
and complete “ship to” information for prop- received from the card issuer, and encourag-
erly determining the tax situs of the transac- ing company management to devote neces-
tion. The question then becomes what steps sary resources to address the sales and use
the taxpayer/card user can take to assure that tax issues.
the appropriate tax has been paid or accrued,
and what steps the tax auditor can use to Companies using procurement cards have
make the same determination. implemented a number of approaches to deal
with the sales and use tax documentation is-
sues. These are reviewed briefly below.
Current Card User Practices for Manual Review and Verification. Given
Verifying Sales and Use Tax that the procurement card statement may pro-
vide little besides the vendor name and the
Accrual or Payment total purchase amount, many companies sim-
ply retain all individual charge card slips is-
Practices for minimizing tax exposure on sued at the point of sale for audit purposes.
procurement card purchases vary widely For this to have even a chance of success, a
among user companies. In every company, corporate policy must be in place requiring
the approach to verification of sales tax the individual card user to maintain all re-
charged and accrual of use tax is dependent ceipts or forward the receipts to a central lo-
upon the perceived risk of unpaid taxes by cation.17 Usually, the receipts are attached to
company management. That is, the choice the periodic statement and forwarded to di-
made by the user company will involve a vision or corporate headquarters. At that
trade-off between the time, expense and com- point, some companies then manually review
plexity that would be involved verifying that each item and accrue tax on the purchase as
the precise amount of tax is paid on each pur- necessary.18 Some companies merely retain
chase, on the one hand, and the risk of either the receipts for state audit purposes, and es-
overpaying or underpaying tax through less timate the tax due by some other method.
time consuming, less expensive and less cum-
bersome, but inherently less accurate, estima- Estimation Methods. Rather than manu-
tion methods on the other hand. ally reviewing and verifying the appropriate
6Procurement Cards and Tax Compliance
tax payment on each transaction individually, items.19 Accordingly, they accrue tax only on
companies have developed several ap- purchases from out-of-state vendors, assum-
proaches to estimating the appropriate tax ing they are not registered and collecting.
accruals based on sampling transactions, etc. Going a step further, they may identify some
It is important to note that estimation involves individual vendors who are exceptions to this
a higher degree of risk for the company than general rule of registered or not registered,
independently verifying the tax paid on each and accrue or not accrue for those specific
transaction. At the same time, the estimation vendors on an exception basis.
methods involve a lesser expenditure of com-
pany resources, thus potentially preserving a An alternative approach that is increas-
higher proportion of the benefits of the pro- ingly used by taxpayers is to estimate the
curement card program. The estimation appropriate accrual of use tax based on a de-
methods used also have varying levels of ac- tailed analysis of procurement card transac-
curacy and varying levels of resource com- tions during a sample period. In such an ap-
mitments required, thus accenting the trade- proach, an appropriate sample of individual
off card users face in determining their pre- procurement card transactions during a given
ferred approach to use tax accruals. State tax period would be examined in detail. Based
authorities have differing rules regarding the on the sample, the company would determine
acceptance (or nonacceptance) of estimation the estimated proportion of its procurement
approaches that are important considerations card purchases for which sales tax is collected
as well. by the vendor. This percentage would then
be applied to subsequent periods, and use tax
The first approach, which must be consid- accrued and remitted for the remainder of all
ered an ultraconservative approach, is used procurement card purchases. The taxpayer
by only a few taxpayers. These companies either continues to save all point-of-sale re-
simply accrue tax on all procurement card ceipts for audit purposes, or saves only the
purchases, without evaluating whether tax receipts from the sample period, with an in-
has been paid to the vendor already or tent of convincing the auditor that this docu-
whether the purchase is in fact taxable. While mentation is adequate for determination of
this approach inevitably results in payment the use tax liability. The proportion of tax-
of more tax than is actually due, these com- able purchases would be reviewed and ad-
panies have determined, based on their aver- justed on a periodic basis.
sion to potential assessments, the nature of
their procurement card program, and the rela- Some card users are augmenting this sta-
tive costs and benefits of other approaches, tistical estimation approach with computer
that this is an appropriate business decision software that analyzes each transaction on the
for them. card issuer's periodic statement to determine
if use tax should be accrued based on certain
Other companies have taken a less con- parameters such as vendor location, account
servative, and less expensive, approach to code charged, and vendor and card user pro-
estimating actual liability, by making the as- files maintained by the company. This ap-
sumption that in-state vendors are registered proach attempts to refine the estimated use
for collection of sales tax and are correctly tax liability by evaluating each transaction
charging and remitting sales tax on taxable against certain criteria that are developed
7Procurement Cards and Tax Compliance
through an analysis of sample of procurement which they deliver merchandise and must use
card transactions. It effectively substitutes a point-of-sale equipment capable of capturing
computerized review and estimate for certain data. When accepting orders, the ven-
manual verification, with the resultant accu- dor must enter the invoice number in a re-
racy of the estimate being dependent on the quired reference field, indicate the amount of
accuracy of the parameters established.20 sales tax collected as a separate amount, and
enter other information provided by the in-
Taking the sampling approach to estima- dividual card users.
tion one step further, some taxpayers have
worked to obtain “preapproval” by the state Card user (purchaser) requirements. When
of an effective tax or accrual rate. In this case, using the procurement card, the individual
an individual state, in cooperation with the card user/purchaser must request the vendor
taxpayer, performs an audit or analysis of a to enter the invoice number in the proper field
sample period, and an agreement is then and to enter the sales tax separately. The card
reached regarding the proportion of total user must also provide a cost center number
purchases determined to be taxable for a pre- and a general ledger account to be entered
determined, and agreed upon, period of time, into a field capable of being defined (within
presuming no material changes are made in limits) by the user company. The card user
the use of the procurement card. The percent- must also give the vendor a code indicating
age is reviewed and adjusted periodically. whether the item is taxable or exempt, and
provide an exemption certificate on any ex-
Combination Approaches. There are also empt purchases. As well, the card user pro-
companies which have designed and imple- vides a ship-to address and obtains a deliv-
mented comprehensive programs which ery date from the supplier.
combine elements of individual verification
and estimation to arrive at the appropriate Card issuer requirements. The procure-
accrual of sales and use tax. To be successful, ment card issuer furnishes periodic reports
approaches such as these require a commit- to the user company. (These reports are cur-
ment on the part of company management to rently in hard copy form, but will be provided
ensure that proper procedures are designed electronically at a future date.) The reports
and followed, sufficient detailed information provide detail on procurement card transac-
is provided by both vendors and card issu- tions and separate transactions where the
ers, and sufficient resources are allocated for additional data described above was captured
monitoring the program and analyzing the at the point-of-sale and where it was not. In
information provided. One company’s pro- addition, the report reflects the likely type of
gram consists of the following elements: vendor based on Standard Industrial Classi-
fication (SIC) code, which helps the taxpayer
Vendor requirements. The company has distinguish between vendors of services
implemented a “preferred vendor” program, (which are more likely to be exempt), and
whereby it directs as much of its procurement vendors of tangible personal property, (which
card business as possible to vendors who are more likely to be taxable). The report also
meet certain requirements. As defined by the reflects a likely taxing jurisdiction (or juris-
company, these vendors must be registered dictions) based on the delivery Zip Code, and
for sales and use tax collection with states to provides a maximum possible tax rate for ju-
8Procurement Cards and Tax Compliance
risdictions in that Zip Code which may be pend on a variety of factors, including the
utilized to assess the accuracy of the tax rate operations of the company, the nature of the
charged by the vendor.21 procurement card program as well as an as-
sessment of the potential tax exposure, and
Subsequent analysis, tax accrual, and ven- the aversion of the company to that risk.
dor follow-up. The company then analyzes
the data provided on the periodic statement
to make tax accruals as required.22 Informa-
tion captured at the point-of-sale, combined Current State Practices for
with additional data available to the taxpayer Verification of Sales and Use Tax
such as vendor profiles and historical pur- Accrual or Payment
chases, is utilized to make a determination of
whether the purchase is taxable and if tax has To date, there is little “real world” experi-
likely been collected; if not, a tax accrual is ence among state tax administration agencies
made. Where additional detail has not been in dealing with procurement card transac-
captured at the point-of-sale, the taxpayer tions in an audit situation. Procurement cards
makes assumptions regarding the likelihood have not been used commercially for a suffi-
of the vendor being registered for tax collec- cient period of time for the transactions to
tion and the product being taxable. For ex- arise frequently in the normal audit cycle of
ample, vendors such as large discount stores the states. As a result, a review of current state
are assumed to have billed the tax, even practices for dealing with procurement cards
though the report does not reflect a separate is necessarily limited.
amount for sales and use tax.23 A sample of
card receipts may be pulled on certain trans- Taxpayer Rulings. Over the past few
actions to determine if sales tax has been years, a number of states have addressed the
billed. The taxpayer verifies sales tax charged procurement card issue in response to ques-
by vendor, and follows up with vendors tions or requests for rulings on the applica-
which are not properly billing the tax. tion of state law and audit practice to a spe-
cific set of factual circumstances as outlined
Through this combination of manual re- by a taxpayer (or card issuing entity). To date,
view, sampling, and estimation analysis, the the rulings issued by states have addressed
taxpayer is reasonably assured that appropri- the acceptability of periodic statements pro-
ate tax has been paid or accrued on its pro- vided by card issuers as a substitute for an
curement card purchases. An approach of this individual, transaction-level charge card re-
sort, however, requires a substantial commit- ceipt or invoice. 24 Generally speaking, the
ment of time and resources for developing state rulings indicate that such statements are
intra-company procedures, educating card acceptable substitutes, to the extent that the
users and vendors, and rigorously working transaction-level information required is
with the data on issuer-supplied statements. available on the statement. The rulings most
often noted that specific information about
In sum, card users have taken a variety of the destination of any goods being shipped
approaches to the tax compliance issues (beyond postal Zip Code) and adequate prod-
raised by procurement cards. The approach uct descriptions were the areas in which the
any individual company will choose will de- card issuers’ statements may be in need of
9Procurement Cards and Tax Compliance
augmentation to meet the requirements of the • Procurement card administrators may
states. A related issue in the rulings is have a database program which con-
whether certain information on the statement tains information useful for develop-
(e.g., vendor identification, tax rates, more ing audit tests (in-state vs. out-of-state,
specific geographic information, etc.) which vendor analyses, card use by dollar
is obtained from other data bases maintained and volume, etc.);
by the card issuer in any way renders the pe- • The general ledger will typically pro-
riodic statement unacceptable documentation vide only the gross amount of the
to the states. States have, likewise, indicated monthly bill, although the monthly
their acceptance of this practice. amount by card may be available;
Audit Practices. Currently, there do not • Card issuers, at the request of the com-
appear to be audit processes and procedures pany, may place controls on card use.
established for procurement card programs. Types of controls include (a) limiting
States have indicated a willingness to work purchases to specific SIC codes; ( b) ju-
with taxpayers when auditing procurement risdictional restrictions which could
card transactions. Initial audit findings indi- eliminate the out-of-state issue; (c)
cate that lack of supporting documentation, transaction limits; (d) dollar limits per
failure to capture tax data, and inadequate transaction; (e) dollar limits per week
procurement card management procedures or month; and (f) limits on daily use;
are resulting in audit assessments. • The company may place controls on
the use of the card through written in-
The most common audit practice is to structions and training. These controls
identify and segregate procurement card may include limiting card use to non-
transactions. Not unexpectedly, this may re- exempt purchases or linking purchases
quire the tax authority to incorporate com- of certain personnel to specific general
puter-assisted auditing techniques and other ledger accounts, projects, cost centers,
methods that allow for population definition, or departments. For example, the of-
sample segregation and stratification analy- fice manager may be authorized to
sis. In addition, this type of work assumes purchase office supplies which are
that the taxpayer has some method of identi- generally taxable. But, the production
fying procurement card transactions in their supervisor may only purchase produc-
computerized records. tion-related supplies or repair parts
which could qualify for exemption in
When developing the audit approach re- some jurisdictions. Auditors should
lated to procurement cards, auditors should conduct tests to ensure the individual
consider the following: card user observes these controls;
• Tax compliance practices for procure-
• Not all tax managers are aware of the ment card purchases may be signifi-
company's procurement card pro- cantly different from traditional pur-
grams. The purchasing department chases. Therefore, assumptions and
may administer procurement card pro- projections of tax liabilities should not
grams and may have limited knowl- be transferred from procurement card
edge of sales and use tax implications; items to traditional purchases.
10Procurement Cards and Tax Compliance
Task Force Recommendations Existing procurement card programs.
Whether a company uses manual review, a
To address the tax administration and tax estimation approach or some combination
compliance issues raised by procurement of the two for verification and accrual of sales
cards the Task Force has developed a series and use tax on procurement card purchases,
of recommendations that recognize two im- the key to success will be to follow the spirit
portant realities.25 First, all parties — card is- of the Model Recordkeeping Regulation and
suers, vendors/suppliers, card users and “maintain all records that are necessary to a
states — have a role to play and must work determination of the correct tax liability.”
cooperatively to develop approaches which Better records reduce the audit exposure.
address the requirements of tax administra-
Well-defined procedures and internal con-
tion without offsetting the benefits of procure-
trols are the first step. When procedures and
ment cards. Second, the recommendations
controls are followed, it is easier to reflect a
reflect that the long-term interests of all par-
logical and understandable method of track-
ties are best served if the level of information
ing and analyzing procurement card transac-
captured through procurement card transac-
tions. If taxpayers do not maintain each in-
tions is upgraded to include the items tradi-
dividual charge card receipt (which may be
tionally used in the tax administration pro-
problematic and will not necessarily provide
cess. Improving the level of information cap-
sufficient information for audit), they should
tured will serve business needs well beyond
be able to assure themselves and an auditor,
tax administration including cost controls,
by way of other internal or external reports,
inventory controls, vendor/supplier relations
that the procedures being followed are in fact
and the like. Accordingly, the Task Force en-
sufficient for a reasonable determination of
courages all parties to focus their resources
tax liability. Regardless of the process used
and work toward a long-term solution in
for determining use tax liability, the taxpayer
which the information captured in a procure-
must have sufficient documentation of that
ment card transaction is substantially similar
process, and the necessary transactional de-
to that captured in more traditional processes.
tail to provide to an auditor.
The specific recommendations of the Task
Force follow. As in any audit, the taxpayer must be pre-
pared in advance by having records available
Recommendation to Procurement Card for the auditor’s review. It will benefit the
Users. The recommendation to companies taxpayer if it already has the capability to
using procurement cards has three parts. The separate procurement card transactions from
first addresses management of an already- other accounts payable transactions, by seg-
existing procurement card program to pro- regation in a general ledger account, by ex-
tect the company from tax exposure, given the traction into a special report, or by some other
current level of information available. The method, so that procurement card transac-
second advises companies that are establish- tions can be examined separately by the au-
ing or expanding a procurement card pro- ditor. It will also assist the examination if
gram. The third encourages companies to use procurement card transaction data is pro-
the resources available to them to push for vided in electronic form and access is pro-
increased information gathering and im- vided to any proprietary software necessary
proved technology. to manipulate the data.
11Procurement Cards and Tax Compliance
New or enhanced procurement card pro- mation may be combined with data
grams. When setting up, expanding, or en- from the company’s accounting
hancing a procurement card program, com- records for a more accurate determi-
panies are advised to undertake steps to mini- nation of tax liability;
mize the tax exposure resulting from utiliza- • Support the utilization of procurement
tion of procurement cards. These include: card analysis software which inter-
faces card issuer information with
• Educate themselves about the inher- company information;
ent tax issues and exposure within pro-
• Utilize direct pay, state-approved, tax
curement card programs under cur-
formulas where available.27
rent technology and practice;
• Involve knowledgeable staff from the Long-term objectives. As the use of pro-
company’s tax function in each phase curement cards expands and technology im-
of setup and administration of the pro- proves, there will be opportunities to increase
curement card program; the level of detail accompanying procurement
• Establish an ability to segregate pro- card transactions. It is important to recog-
curement card purchases from other nize that, as new technologies are developed,
purchases. This will provide the taxpayers may have better information not
company’s internal tax staff, as well as only for the determination of tax liability, but
a state taxing authority, the ability to also for other business purposes. Company
separately examine these transactions; management should both encourage and
work with card issuers and vendors/ suppli-
• Design and implement procedures and
ers in adopting new technologies and devel-
internal controls such that the records
oping better information sources.
may be relied upon by the company
and by an auditor26; Local sales tax administration. Taxpayers
• Institute a program whereby key and tax authorities alike recognize that a sig-
spending will be directed to vendors nificant portion of the complexity associated
that utilize the most up-to-date point with sales and use taxes in a multijurisdic-
of sale equipment and technology; tional environment derives from local gov-
• Require that vendors be registered ernment sales and use taxes, particularly if
when and where appropriate for bill- tax rates vary from jurisdiction to jurisdiction
ing and remitting of state and local and there exist any differences between the
sales tax; state and local tax bases. Taxpayers should,
therefore, take such steps as are available to
• Require that the procurement card is-
work with the appropriate legislative bodies
suer provide as much relevant infor-
when the opportunity arises to ensure they
mation as possible, including informa-
understand, and work to minimize or reduce,
tion that may not be captured at the
the complexity and issues associated with
time of sale, but may otherwise be
local sales and use taxes and the burden im-
available from the card issuer;
posed on businesses.
• Obtain this information in a manage-
able report and electronic data file Recommendations to Vendors/Suppli-
whenever possible, so that the infor- ers. Vendors are ultimately the key to pro-
12Procurement Cards and Tax Compliance
viding good information to their customers. have and are utilizing the best technology
Vendors in the procurement card process will available, and that the card issuers are, in turn,
ultimately enhance their business by improv- transferring all of the information to the cus-
ing their capacity to provide detailed trans- tomers that require it.
action information to their customers. Ven-
dors must respond to the increased require- Recommendations to State Tax Authori-
ments of their customers and provide qual- ties. State tax administrators are not simply
ity services to them. Providing the increased interested bystanders in the procurement card
information does not necessarily require the process. They have an important stake in en-
acquisition of additional equipment and es- suring that the state’s exposure to tax avoidance
tablishment of redundant data capture pro- is appropriately controlled and managed. At
cesses. Interfaces exist to extract information the same time, procurement cards will neces-
from vendor point-of-sale systems for trans- sarily require changes in traditional audit
fer to procurement card processing systems. approaches and procedures, or there is a risk
Any costs of upgrading technology and sys- of frustrating the implementation of procure-
tem integration may be more than offset by ment card programs and wasting state audit
the increase in business and the ability to pro- resources.
cess a higher volume of transactions at a more
rapid and efficient pace. Taxpayer Guidance. To assist taxpayers,
state tax authorities should strive to provide
It is important for vendors to involve their as much informational guidance as possible
corporate tax staff when drafting policies and regarding the treatment of, and requirements
procedures for processing procurement card for, procurement card transactions. Such
transactions. Vendors should have policies guidance may come in response to specific
and procedures in place to ensure that they questions or through more general informa-
are properly registered in states where they tional bulletins and releases. Areas in which
have nexus for sales tax purposes. They must guidance would be helpful include records-
be educated about requirements for docu- retention standards which will be required of
mentation of exempt transactions, and main- taxpayers, the acceptability of accrual esti-
tain proper exemption or direct payment cer- mates developed by the taxpayer using valid
tificates for those transactions. In some cases, (and replicable) sampling procedures, and
it may be necessary for tax staff of vendor areas to be examined in audits of procurement
companies and their customers to work to- card transactions. Specifically, as recom-
gether to resolve complex tax issues. Devel- mended in the Model Regulation developed
oping good communications between ven- by the Task Force, states should adopt a stated
dors and customers regarding tax issues will policy that periodic statements provided by
enhance the business relationship. procurement card issuers may be accepted as
appropriate documentation in lieu of retain-
Finally, vendors should work to develop ing and providing invoices or individual
sound relationships with procurement card charge card receipts, to the extent that the
issuers. Vendors and card issuers should statement contains the requisite transaction-
work together to develop industry standards level information required by the state.
for data capture for procurement card pro-
Audit Techniques. Auditing procurement
grams. Vendors should be satisfied that they
card transactions in a cost-effective manner
13Procurement Cards and Tax Compliance
will require that states develop techniques to • Use sampling techniques to reduce the
minimize the examination of individual trans- number of individual source docu-
action receipts for proper payment of tax. ments examined;
Many procurement card programs are used • Use computer-assisted audit tech-
for high-volume, low-dollar purchases. Ex- niques if transaction or summary in-
tensive examination of individual transaction formation is available in electronic
receipts in such an environment is neither fea- form, and if the procurement card
sible nor cost-effective. transactions can be identified;
• Stratify procurement card transactions
It is important that states develop appro-
into categories to make it easier to fo-
priate auditing standards, techniques and
cus on types of purchases for which tax
guidelines for procurement card purchases.
accrual is most likely required. Such
To meet the needs of both tax authorities and
strata could include in-state vs. out-of-
taxpayers, such techniques should have
state purchases, by vendor, by user, by
among their objectives minimizing the exami-
user location, by type of product or
nation of individual transaction receipts, test-
taxpayer chart of account code;
ing and evaluating approaches taxpayers
have developed to verify appropriate use tax • Test and use software sometimes made
accruals, and conducting such independent available to companies by card issu-
tests as necessary to determine payment of ers which allows procurement card
the correct amount of tax. Depending on the transactions to be mapped to general
nature of the taxpayer’s records, and the laws, ledger accounts and manipulated (i.e.,
regulations and case law of each individual sorted, stratified, etc., not altered) to
state, these procedures might include: assist in any analysis;
• Use periodic reports provided by card
• Examine a taxpayer’s written opera- issuers which state the amount of tax
tional procedures for procurement paid to vendors on purchases to exam-
card transactions and the internal con- ine effective tax rates and identify
trols used by the taxpayer; transactions which fall outside accept-
• Test, validate and evaluate taxpayer able tolerances;
systems for verifying or estimating ap- • Give appropriate recognition in
propriate tax accruals on procurement samples and detailed analysis to trans-
card transactions; actions involving retailers registered
• Segregate procurement card transac- for tax collection with the state and to
tions from other purchases for analy- retailers that are regularly audited by
sis purposes if possible. Procurement the state for sales tax purposes.
card transactions may have different
characteristics from the population of Other Recommendations. Other steps
purchases as a whole in terms of that state tax authorities should consider to
taxability, tax paid, etc. Segregation of facilitate the appropriate use of procurement
the transactions will prevent these dif- cards by taxpayers would include:
ferences from skewing the results of a
• State tax authorities should consider
sample of the rest of the population;
working with taxpayers in establish-
14Procurement Cards and Tax Compliance
ing pilot procurement card review pro- sales and use taxes, particularly if tax
grams if requested and if resources are rates vary from jurisdiction to jurisdic-
available. In such an arrangement, the tion and there exist any differences
tax authority could review proposed between the state and local tax bases.
controls and procedures to assure ap- Tax authorities should, therefore, take
propriate purchases are reviewed for such administrative steps as are avail-
tax accrual purposes and review tax- able to minimize such complexity and
payer-conducted analysis of projected to work with the appropriate legisla-
accrual rates. tive bodies when the opportunity
• State tax authorities, where their laws, arises to ensure that they understand
regulations and case law permit, the complexity and issues associated
should consider entering into agree- with local sales and use taxes.
ments with taxpayers regarding pro-
curement card transactions. By way It is important to note that the procure-
of example, such an arrangement ment card process and available information
might have the taxpayer conduct a re- are in a transition period. Thus, flexibility in
view and develop an estimated tax the audit process may be necessary until
accrual rate for its procurement card products and systems for capturing the re-
transactions. If the tax authority finds quired data have been refined.
that the work of the taxpayer meets
acceptable standards, it would autho- Recommendations to Card-Issuing Enti-
rize the use of the estimated rate for ties. Card issuers as well as their respective
the upcoming audit period. On audit, supervisory organizations (in the case of bank
the tax authority would focus its efforts cards) have an important role to play in re-
on the verification and examination of solving the use tax issues associated with pro-
the estimated tax accrual rate. De- curement card transactions. The position of
pending on state law and practice, the the Task Force is that all interested parties
agreement might also address ques- should strive to ensure that detailed informa-
tions regarding assessments of addi- tion is ultimately available to card users in a
tional tax and penalty if the rate de- meaningful and useable form. Such informa-
veloped on audit is within a specified tion is necessary not only for tax administra-
tolerance from the originally projected tion purposes, but it also serves other impor-
rate, provided that the underlying na- tant corporate purposes for the card user, in-
ture of the process and business use of cluding cost control and appropriate finan-
the procurement card does not change. cial analysis. Card issuers and related par-
The agreement might also provide that ties are the primary “interface” between the
the rate developed on audit would be card user and the vendor/supplier for pro-
used on a prospective basis. curement card transactions; they are also the
• Taxpayers and tax authorities alike rec- ultimate provider of information to the card
ognize that a significant portion of the user. As such, they have a critical role in en-
complexity associated with sales and suring that all required information will ulti-
use taxes in a multijurisdictional envi- mately be available to card users. To guide
ronment derive from local government card issuers in this area, the Task Force offers
the following recommendations:
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