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Procurement Cards and Sales Tax Compliance:
Mastering the Complexities
THURSDAY, MARCH 21, 2019, 1:00-2:50 pm Eastern
FOR LIVE PROGRAM ONLY
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THURSDAY, MARCH 21, 2019
Procurement Cards and Sales Tax Compliance: Mastering the Complexities
Thomas J. Fleming, CPA, MST, Principal
Withum Smith+Brown, Philadelphia
Jennifer Weidler Karpchuk, Senior Counsel
Chamberlain Hrdlicka White Williams & Aughtry, Philadelphia
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Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
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Strafford Webinar
March 21, 2019
Jennifer Weidler Karpchuk, Esq.Chamberlain Hrdlicka White Williams & Aughtry
300 Conshohocken State Road, Suite 570West Conshohocken, Pennsylvania 19428
610 – 772 – [email protected]
Procurement Cards and Sales Tax Compliance
Thomas Fleming, CPA MSTWithum Smith+Brown, PC
Two Logan Square, Suite 2001, Philadelphia, Pennsylvania 19103
267 – 238 – [email protected]
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Traditional Purchase Process
1. Requisition →
2. Purchase Order →
3. Invoice →
4. Approval of Invoice →
5. Payment to Vendor.
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P-Cards: Benefits
• Reduce purchasing timeo More rapid payment to vendor
• Reduce administrative costso Especially for “high volume/low dollar” transactions.
o Can save 35-40% on overall internal purchasing costs.
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P-Cards: Common Uses
• Office supplies;
• Services;
• Travel;
• Meals and entertainment.
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How P-Cards Work
• P-card issuer provides single electronic invoice to end-user at least once per month detailing transactions and totals.
• P-card issuer is paid in full at least once per month.
• Organization processes the p-card invoice and creates accounting entries.
• Organization assumes liability for payment.
• Cardholders expected to follow organization’s policies and procedures related to p-card use.
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P-Cards – State Taxation
• No effect on determining taxability of transaction
• Transaction not automatically taxable or exempt
• P-cards have no special tax treatmento Ex. Wisconsin Sales and Use Tax Report No. 2-10, Department of
Revenue (June 1, 2010):
VII. SALES AND USE TAX TREATMENT OF PROCUREMENT CARD PROGRAMS
Purchases made under a P-Card program are not afforded any particular preferential advantage over any other purchasing method and are subject to the same record keeping and record retention requirements outlined in sec. Tax 11.92 of the Wis. Adm. Code.
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Mistakes with P-Cards lead to…
• Underpayments of Sales and Use Tax; and
• Overpayments of Sales and Use Tax.
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Underpayment of Tax –Audits & P-Cards
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• If audited, purchaser must prove:
Sales tax paid in the correct amount to a merchant; or
Use tax self-assessed and remitted to the state; or
The goods or services are exempt from tax
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Underpayment of Tax –Audits & P-Cards
14
• P-card transactions generally audited separately
from traditional accounts payable data on a test
basis.
• Auditor uses sample ; deficiencies found are
projected over the audit period
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Underpayment of Tax –Audits & P-Cards
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• Information needed to determine if tax was paid:
Date of purchase
Item/service description
Price
Ship-to-location
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Underpayment of Tax –Audits & P-Cards
16
• P-cards have the same requirements as physical
invoiceo Ex. New York – Press Release, New York State’s Policy on Procurement
Cards, Public Information Office, new York Department of Taxation and
Finance (September 11, 1998)
“The Department policy concerning purchases made through the use
of corporate procurement cards (P-cards) is that the record-keeping
requirements for businesses using P-cards are the same as the
requirements if P-cards were not used.”
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Underpayment of Tax –Audits & P-Cards
17
• Issue: whether the information provided to card
users on periodic statements from the card issuer
regarding purchases made with p-cards is sufficient
documentation to evidence the correct amount of
state and local sales or use tax was collected on
the transaction at the time of the sale.
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Underpayment of Tax –Audits & P-Cards
18
• Audit Issues with P-Cardso Ex. Pennsylvania – Sales and Use Tax Audit Manual, Pa. Department of
Revenue – Bureau of Audits, ch. 3(E)(3)(c)(iv), 06/12/2012.
Audit issues regarding the use of p-cards include:
• A purchase order is not used.
• The monthly lump sum payment made to the credit card company is
for multiple purchases to multiple vendors and does not include
transactional level detail necessary for audit purposes.
• Vendor source documents identifying an item description, purchase
price and sales tax charged are often not maintained or readily
accessible.
• A single payment may be assigned to several accounts and cost
centers.
• Organizations are replacing checks with purchasing cards and
automating the payment to the supplier complication proof of
payment related to the individual purchases.
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Underpayment of Tax –Audits & P-Cards
19
• Audit Example – Indiana – Letter of Findings No. 04-
20130690P, Indiana Department of Revenue, May 28,
2014o Facts:
• Sales and Use Tax audit;
• Employees made purchases to perform work via company p-cards;
• Taxpayer maintained p-card policy and procedure to ensure sales and
use tax was properly paid or remitted;
• Could not provide source documents for 1.6% of audit sample;
• Auditor determined that taxpayer purchased some TPP via p-cards
without paying sales and use tax.
• Department assessed 10% negligence penalty.
o Holding: 10% negligence penalty abated.
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Overpayment of Tax –How? Why?
• Online sellers
• Accounts Payable
• Distance
• Relationship between suppliers and manufacturers
• Exemptions
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Overpayment of Tax –How? Why?
• Exemptions:
States that do not assess sales tax
Exempt purchasing entities
Purchases enumerated as exempt
Uses for purchases that are exempt
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Overpayment of Tax –How? Why?
• States that do not assess sales tax
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Overpayment of Tax –How? Why?
• Exempt purchasing entities
o Federal, State and Local Government
o Non-profit Organizations
• Purchases Enumerated as Exempt
o Vary state to state
o Complex, inconsistent, or confusing treatment of items
• Examples:
o Unprepared foods
o Snickers vs. Twix
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Overpayment of Tax –How? Why?
• Uses for Purchases that are Exempt
o Raw materials used in manufacturing;
o Components that are resold as part of integrated system
o Machinery and equipment used directly in the
manufacturing process
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P-Cards: Compliance Issues
• When is the purchase/sale deemed to be made?
→ Upon transfer of title?
→ Date goods transferred or services rendered?
→ At the time of charge?
• Keep receipt information and packing slips/shipping
documentation.
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P-Cards: Compliance Issues
• Exemption Certificates
o Use of the proper exemption form
• State specific?
• Multi-jurisdictional?
o Resellers
• Single transaction?
• Blanket certificate?
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P-Cards: Compliance Issues
• Technology
o Equipment and technology necessary to capture
transaction-level detail is not commonplace among
vendors.
o Generally processed using three different types of systems:
1. Customary retail credit or charge card systems;
2. Intermediate-level systems; or
3. System in which required information is captured and
subsequently provided to the card issuer.
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P-Cards: Non-Compliance
Can lead to…
o Penalties
o Interest
o Revocation of business license/authority to conduct
business in the jurisdiction
o Trust Fund Tax
• Officer liability
• Successor liability
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Approaches to Deal with Documentation Issues
• Manual Review and Verification
• Estimation Methodso Higher risk, less expenditure
• Managed Audits/Managed Compliance
• Direct Pay Permit with Vendors
• Accrue Use Tax on all P-Card Transactions
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Best Practices
• Establish procedures for tax compliance
• Sales and use tax training for P-card employees
• Establish good recordkeeping guidelines
• Open communication
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Jennifer Weidler Karpchuk, Esq.Chamberlain Hrdlicka White Williams &
Aughtry300 Conshohocken State Road, Suite 570West Conshohocken, Pennsylvania 19428
610 – 772 – [email protected]
32
Thomas Fleming, CPA MSTWithum Smith+Brown, PC
Two Logan Square, Suite 2001, Philadelphia, Pennsylvania 19103
267 – 238 – [email protected]
Questions?