An automated tax solution is necessary for organizations as their procurement transactions increase. There are key challenges to manually calculating taxes for procured goods and services, including determining tax rates that vary by location, accounting correctly for item movements, and validating supplier invoices. An automated solution can handle the complexities of taxes for procurements across legal entities, projects, warehouses with incentives, and returns. It provides cost benefits over manual methods and reduces audit risks.

1. Procurement Tax Automation
Author: Vinod Sinha
Most organizations in their early stage implement automated
tax solutions for selling goods/services but manage tax
transactions manually for procuring goods/services. When the
number of procurements increases substantially with growth in business, an
automated tax solution becomes necessary. This article highlights key
transactions that are subject to procurement tax estimation and attempts to
show why it is important to have an automated tax solution in place.
There are key challenges with manual tax calculation. First,
during the tax calculation a person spends significant amount
of time in determining the final destination of goods/services
procured, ever changing tax rates as per the state and local
jurisdictions, the correct accounting string, etc. This is prone
to error causing major audit risk. Second, the organization may lose money
because it depends heavily on its suppliers to calculate tax on invoices and cannot
validate the accuracy of tax charged. Third, it is not possible to track equipment
movement manually to recalculate tax amount recorded earlier. For example, if a
product is delivered at one location as per the purchase order but then actually
moves to another location, the tax rate should be determined based on the final
destination. In absence of monitoring such movements, it is very much possible
to calculate tax for the first location and not the final destination. Finally, it can
become very difficult to calculate tax for organizations taking benefit of
warehouses in states such as Nevada providing tax incentives for storing
equipment.
An organization may first choose to estimate tax on a purchase
order for budgetary reason. This may not be the final tax
amount to be paid for reasons like shipped quantity not being
the same as the ordered quantity, invoice amount not matching
the charged amount on the purchase order, etc. Therefore, an
invoice should be the final document to consider for tax calculation. In many
cases, a PO or an invoice line is associated with a project where an organization
wants to track its expenditures by project. This brings additional complexity
because the shipped location on the PO may not be the final destination of the

2. product and the location associated with the project becomes the primary factor.
In addition, tax lines on an invoice or a PO tied to a project are transferred to the
project system as project expenditures and therefore, additional consideration is
required to avoid duplicate transfer of tax lines into general ledger.
Similarly, if an organization is taking benefit of tax incentives from its storage
location then tax should be calculated when a product is leaving the warehouse.
If the warehouse is under one legal entity and the destination location of the
product is under another legal entity, the transfer transactions across multiple
entities bring additional complexities. Furthermore, if the movement transaction
is charged to a project then tax calculation for such transaction becomes trickier.
It is also easier to miss the reverse logistic process in
considering tax calculation on procured products. For
example, if a product is procured but returned under
warranty to supplier without using it then tax originally paid
for that product should be credited. Similarly, the tax calculation may be avoided
if the supplier is replacing/repairing a defective used product under warranty.
Finally, the tax charged by a supplier on an invoice must be validated whether the
tax amount is correct. The procuring organization will have to set the tolerance to
specify how much deviation is acceptable. There can be multiple ways to deal
with incorrect tax charged by a supplier such as putting tax hold on the invoice
until the discrepancy is resolved, pay tax and ask for the credit from the supplier if
overcharged, do nothing if the difference is within the tolerance, etc.
Therefore, an automated procurement tax solution takes care of all these
complexities to provide cost benefits as well as reduced audit risks. There are
several leading brand names that provide procurement tax solution and it’s
money worth spending if the implementation and configuration is done
thoughtfully!
Disclaimer: The opinions and views expressed in this article are those of the author and do not represent
any company or entity.