Leveraging the knowledge of complementary tax groups: best-practice tax departments are banding together to leverage the knowledge of other tax groups within their organization to integrate their tax operations.

AuthorYrjanson, Carla
PositionREAD FOR CPE CREDIT

Property, sales and use taxes are leading sources of revenue for states, generating nearly $150 billion in the second quarter of 2010 alone. Collection of these taxes is becoming more critical as state governments struggle to address budget shortfalls.

While they continue to rely on taxes to shore up their deficits, the impact on businesses has largely been overlooked. Each sales or property tax change represents a significant operational and cash flow outlay for businesses that are burdened with implementing those changes in a timely fashion.

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In addition, with this greater reliance on taxes for revenue comes an expectation of more "cross-auditing." In other words, government tax departments are putting more emphasis on streamlining and collaborating on their efforts to collect taxes, so it is imperative that businesses do the same. Because of their inherent focus on material goods, as well as the complexity of respective laws, two tax groups that should consider working together are property tax and indirect tax.

Property and Indirect Tax Compliance Complexity

According to a Tallman Insights research report, indirect tax compliance, such as sales tax and value-added tax, is a legal obligation costing businesses more than $327,000 annually (spent on staff, consultants, returns preparation, tax rate updates and more). However, if not done accurately, businesses risk significant exposure in audit assessments, interest and penalties.

With unrealistic timeframes, in which businesses are often expected to comply within weeks of tax law changes, it should come as no surprise that a typical business gets hit with an average of between $10,000 and $30,000 in penalties and interest each year.

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Beyond the current market conditions, calculation and determination of taxes is not as simple as it might sound. Each transaction has unique characteristics that affect and change the specific tax rates or calculation applied--depending on who, what, where, when, why and how the exchange was made.

A business can face multiple overlapping tax-collecting jurisdictions--countries, states, counties, cities and special districts--and tangled rules in the various tax authorities based on the type of business, location or where the products and services will ultimately be used. Even for a small company, this can equate to countless hours of updating tax rate tables, calculating and invoicing the tax, filing returns, reporting and spending time during an audit.

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Add to the mix a dynamic and fluid market, in which businesses are trying to cut costs, only to be burdened with additional tax compliance requirements, and companies are naturally finding it more and more challenging to remain in compliance.

Costs of Tax Transactions and Cost Management

But just how much does each transaction tax change cost businesses? To give an example, in the United States, based on real-world...

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