sales and use tax reserve strategies under latest sec...

Sales and Use Tax Reserve Strategies

Under Latest SEC Orders and Guidance Best Practices for Setting Reserves Amid Government and Audit Scrutiny

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Please refer to the instructions emailed to the registrant for the dial-in information.

Attendees can still view the presentation slides online. If you have any questions, please

contact Customer Service at 1-800-926-7926 ext. 10.

TUESDAY, MARCH 12, 2013

Presenting a live 110-minute teleconference with interactive Q&A

William Ault, Director, Crowe Horwath, New York

Myron Vansickel, National Tax Director, Strategic Accounts, Experis, Washington, D.C.

For this program, attendees must listen to the audio over the telephone.

Tips for Optimal Quality

Sound Quality

Call in on the telephone by dialing 1-866-873-1442 and enter your PIN when

prompted.

If you have any difficulties during the call, press *0 for assistance. You may also

send us a chat or e-mail [email protected] immediately so we can address

the problem.

Viewing Quality

To maximize your screen, press the F11 key on your keyboard. To exit full screen,

press the F11 key again.

Continuing Education Credits

Attendees must stay on the line throughout the program, including the Q & A

session, in order to qualify for full continuing education credits. Strafford is

required to monitor attendance.

Record verification codes presented throughout the seminar. If you have not

printed out the “Official Record of Attendance,” please print it now (see

“Handouts” tab in “Conference Materials” box on left-hand side of your computer

screen). To earn Continuing Education credits, you must write down the

verification codes in the corresponding spaces found on the Official Record of

Attendance form.

Please refer to the instructions emailed to the registrant for additional

information. If you have any questions, please contact Customer Service

at 1-800-926-7926 ext. 10.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please

complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-

hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a

PDF of the slides and the Official Record of Attendance for today's program.

• Double-click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

Sales and Use Tax Reserving Strategies Under Latest SEC Orders and Guidance Seminar

Myron Vansickel, Experis

[email protected]

March 12, 2013

William Ault, Crowe Horwath

[email protected]

Today’s Program

Review Of Material Terms Of ASC 450

[William Ault]

Hypothetical Taxpayer Sales Tax Reserving Scenarios

[Myron Vansickel]

Slide 8 – Slide 20

Slide 21 – Slide 54

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.

7

REVIEW OF MATERIAL TERMS OF ASC 450

William Ault, Crowe Horwath

Loss Contingencies: Material Terms

I. Recognition

- Probable, reasonably probable and remote

- Estimable

- What is a liability and what is a loss contingency?

II. Measurement rules and an estimated range of loss

III. Disclosure rules: Probable and reasonably possible

contingencies

IV. Recent end to FASB’s project on loss contingency disclosure

requirements

9

Recognition Of A Loss Contingency

An estimated loss from a loss contingency shall be accrued by a

charge to income if both of the following conditions are met:

a. Information available prior to issuance of the financial

statements indicates that it is probable that an asset had been

impaired or a liability had been incurred at the date of the

financial statements. It is implicit in this condition that it must be

probable that one or more future events will occur confirming the

fact of the loss.

b. The amount of loss can be reasonably estimated.

10

Slide Intentionally Left Blank

Probable, Reasonably Possible Or Remote?

Probable: The future event or events are likely to occur.

Reasonably possible: The chance of the future event or events

occurring is more than remote but less than likely.

Remote: The chance of the future event or events occurring is

slight.

12

Can The Amount Of The Loss Be Reasonably Estimated?

The requirement that the loss be reasonably estimable is intended

to prevent accrual in the financial statements of amounts so

uncertain as to impair the integrity of those statements.

Disclosure is preferable to accrual when a reasonable estimate of

loss cannot be made.

Does it relate to the current period or a prior period?

13

Loss Contingency Vs. Liability

A loss contingency is defined as an existing condition, situation or

set of circumstances involving uncertainty as to possible loss to an

enterprise that will ultimately be resolved when one or more

future events occur or fail to occur.

Amounts owed are not contingencies even though the accrued

amounts may have been estimated. There is nothing uncertain

about the fact that those obligations have been incurred.

14

Measurement Of A Loss Contingency

When both of the recognition criteria are met, and the reasonably

estimable loss is a range, accrual is required of:

- The amount that appears to be a better estimate than any other

estimate within the range, or

- The minimum amount in the range, if no amount within the

range is a better estimate than any other amount.

15

Disclosure When A Loss Contingency Is Not Recognized

Disclosure of the contingency shall be made when there is at least

a reasonable possibility that a loss or an additional loss may have

been incurred.

The disclosure shall indicate the nature of the contingency and

shall give an estimate of the possible loss or range of loss, or

state that such an estimate cannot be made.

16

Disclosure When A Loss Contingency Is Not Recognized (Cont.)

Disclosure is not required of a loss contingency involving an

unasserted claim or assessment, when there has been no

manifestation by a potential claimant of an awareness of a

possible claim or assessment, unless:

- It is considered probable that a claim will be asserted, and

- There is a reasonable possibility that the outcome will be

unfavorable.

Information may become available indicating that an asset was

impaired or a liability was incurred after the date of the financial

statements, or that there is at least a reasonable possibility that

an asset was impaired or a liability was incurred after that date.

17

The FASB’s Loss Contingency Disclosure Project Ends

Decision reached at the July 9, 2012 board meeting:

The staff summarized its outreach with regulators and provided a

short review of the feedback received on the two previous

exposure drafts. The staff posed the question to the board as to

whether the project should remain on the agenda, and if so what

the next steps are. The board voted 5-2 to remove the project

from the agenda, with no further action.

18

Scope Of FASB July 2012 Invitation To Comment

The invitation to comment applies only to notes to financial

statements. It does not address parts of a financial report outside

of financial statements, such as management’s discussion and

analysis (MD&A).

The invitation to comment applies to financial statements of

public and non-public entities.

20

HYPOTHETICAL TAXPAYER SALES TAX RESERVING SCENARIOS

Myron Vansickel, Experis

Case Study: Application Of ASC 450

Sales and use tax reserves have come under more scrutiny as a result of the enactment of the Sarbanes-Oxley Act and pressure on state and local jurisdictions to raise revenue. The SEC is now following up on contingent liabilities as well. Senior management has become aware of internal controls to understand what is in each reserve, and sales and use taxes have greater visibility before the C-suite now.

22

Nexus Reviews

Regarding nexus, as it relates to the level of activities a business performs within a given state and meaning a connection such that the taxpayer enjoys state benefits such as courts, fire and police protection

- Review what activities a state dictates that create nexus for sales tax collection and/or use tax payments

- Review business expansion plans, when possible, in order to be proactive on identifying new states where nexus has been created

- Nexus meaning a connection to the State where the taxpayer in is enjoying the benefits the State has to offer, such as, the state courts, fire and police protection.

23

Voluntary Disclosure Programs

The majority of states use voluntary disclosure agreement (VDA) programs that allow an unregistered taxpayer to present itself to resolve outstanding tax liabilities. These programs usually allow for a limited lookback period for taxes, and may limit interest and waive penalties.

Review each state’s program to understand what its requirements are, and if interest is capped and/or penalties waived

Also, be aware of what taxes are available to resolve under a VDA. Most commonly, income/franchise and sales/use taxes qualify. Other taxes may be included, but be aware that when you apply for one tax, the taxing authorities may ask if you have complied with all taxes due and owed to their state.

24

Case Study: Application Of ASC 450 (Cont.)

Corporation V Corporation V is a publicly traded media and printing company with

$2 billion of annual revenue. In 1999, it was composed of 35 U.S. companies with three major business lines. The consolidated financial statements showed a $7 million ASC 450 sales/use tax contingency. Of that figure, $6.7 million was related to sales tax. Annual additions to the reserve were close to $1 million.

26


Where do you start the analysis to determine whether this reserve is

adequate for potential exposure?

What caused this reserve to grow?

Should this reserve be greater or less?

27


Information-gathering is the first step. After reviewing prior sales and use

tax audits, it was determined that the majority of assessments were for sales tax on products; then came use tax on purchases of supplies and fixed assets.

28


The first areas to review were the order entry, sales tax rates, sales tax determination, and the computation module and billing system.

The process was to determine how product codes were set up as either taxable or non-taxable.

29


It was discovered that the taxpayer had three different ERP systems, which

had varying degrees of sophistication regarding their abilities to tax the companies’ products correctly.

30


The largest ERP system was reviewed to determine the level of compliance. It

was determined that there were several disconnects within the system, and the tax and IT staffs would have to identify issues and resolve them together. This was an older version of tax software in which coding changes needed to be implemented to make tax corrections.

31


The other two ERP systems had both similar and dissimilar issues related to taxing products.

Issues were identified, and then plans were implemented to resolve these issues.

32


New versions of sales tax software now allow the company tax department to make the tax determinations directly, due to the data basis nature. This eliminates IT maintenance time and allows for timely changes within the system.

33


Corrective action plan:

Re-compute the reserve requirements on what was learned and use this as the benchmark to measure improvement

A product code matrix was developed that included all other separately stated invoice items, e.g. shipping costs.

34


Review the matrix and add a taxable or non-taxable column

Reference appropriate tax research to support the tax determination

Review this matrix with what was already in the system, and prepare a corrective action plan

35


The tax department continued to investigate whether the company was filing

in all jurisdictions where it had created nexus, for sales tax purposes. This required reviewing the business operations, including the sales force, to

determine what activities were occurring that might create nexus for collection responsibilities.

36


After coming up with a revised list of taxing jurisdictions, tax met with the legal department to determine where the company should be registered to “do business” and register for sales tax collection.

37


Subsequently, with the legal department’s and CFO’s support, the tax

department became the clearinghouse for determining where the company needed to qualify to do business and register for sales and use taxes.

38


This meant that every time a new home office or new state needed to be established, for payroll purposes, the tax department was notified and investigated if nexus was created. The tax department initiated all registrations for taxes, whether payroll or sales/use, through the legal department. This kept the tax department immediately in the know about any business change that would affect sales and use tax collection.

39


The next phase was to implement the necessary changes for sales tax that arose from errors identified in sales tax audits. This was done via a product code matrix/tax determination process.

40


Fixed-asset purchase procedures were reviewed, and use tax accrual procedures were developed and implemented. Printing companies are similar to manufacturers in many aspects, so in several states, their equipment purchases were exempt. However, some states lacked an exemption, so use tax needed to be paid.

42


Tax audits were reviewed for the types of expense purchases that were subject to use tax. A taxability matrix was developed, similar to the product code/tax determination matrix. This was implemented through the purchasing chain in order to provide for appropriate accrual of use taxes.

43


The tax department developed use tax accrual worksheets that included the appropriate use tax rates, to facilitate the accrual process. Although manual, they did provide a mechanism to facilitate compliance.

44


The tax department implemented policies and procedures regarding company purchases, in order to take advantage of resale and manufacturing exemptions where applicable.

45


The tax department, along with the sales force, reviewed customer files to validate whether the customer should complete a resale certificate or an exemption certificate.

46


Policies and procedures were then implemented in the sales-ordering

process, in order to obtain appropriate documentation from each new customer. Annual reviews of customer files were performed to make sure that valid resale and exemption documentation were maintained.

47


The company’s reserve dropped to less than $500,000 within five years, based on the implementation and review of controls. Annually, steps taken reduced the cost of audits by about $900,000. That is a dollar-for-dollar pick-up to the bottom line.

48


Information needed to calculate the ASC 450 sales/use tax reserves:

Remember that your company may have nexus issues, and that the statute of limitations do not run in a taxing jurisdiction until you have filed returns.

I. Listing of all taxing jurisdictions where the entities have sales/use tax nexus

II. Date the business began operating in these taxing jurisdictions

49


• Listing of the statute of limitations for each taxing jurisdiction

• Date of registration in each jurisdiction

• Starting dates when returns were first filed in each jurisdiction

• Copies of all sales and use tax audits settlements for the past five years, and any current issues from ongoing audits

• Develop a spreadsheet to incorporate all this information

50


Review the audit settlements and determine if corrective action was taken, and the time period during which any action was taken

Calculate whether there was a unresolved time period for which an error was noted in an audit

51


Calculate the potential tax for each tax uncertainty for a time period that is still open under the statute of limitation

Accrue the tax calculated in the reserve

52


Update your reserve monthly, as new uncertainties are uncovered and a month of the statute of limitations rolls off

This will be the basis of your reserve analysis

53


Sales Tax Accrual Analysis - A/C 000-000-0000

6/30/2009

Tax

Estimat

ed Total Average Projected

Audit Amount Date Unpaid Audit

No.

Of Audit Next

Aud

it Open Monthly Reserve

Period Paid Paid Amount Liability Status

Aud

its Liability

Assessme

nt

Peri

od

Period

s

Assessme

nt Accrual

California Jan-84 - Mar-87 352,653 0 352,653 Final 1 36

Jul-87 - Dec-90 450,000 0 450,000 Final 2 36

Jan-91 - Dec-94

1,152,45

5 0

1,152,45

5 Final 3 651,703 36

Jan-95 - Dec-97 80,000 Final 4 508,777 36

Jan-98 - May-98 Lapsed 5

Apr-98 - Dec-00 333,833 10/01/02 Final 5 473,788 33

Jan-01 97,692 Self audit 36

Sep-04 93,511 01/01/06 Final 6 426,691 9

Oct-04 Dec-07 126,600 05/01/09 Final 7 36

Jan-08 Jun-09 Accrual 100,000 36 18 2,778 50,000

54

sales and use tax reserve strategies under latest sec...

Documents