Corporate procurement card programs: are they paperless chaos?

• Author: Loftis, Mark D.
• Position: Sales/use taxes for card programs

Introduction

Many credit and bank card companies are aggressively marketing corporate procurement card' programs under which cards are issued to a broad class of corporate employees for use in purchasing a wide range of goods and services. The procurement card programs offer the companies a streamlined procedure for making and documenting their purchases, saving both time and money. These programs, however, are not without significant tax implications. This article examines the sales and use tax considerations in respect of procurement card programs.

In today's environment of corporate downsizing and out sourcing, corporate procurement card programs have become come an attractive way to reduce, or in some cases eliminate, the relatively high internal costs of the low dollar/high volume corporate purchasing process. It has been estimated that in most large to medium size companies 60 percent of all purchases are individually less than $500 (30% less than $100, which account for less than 5 percent of total purchasing expenditures. The internal cost of these transactions has been estimated at between $120 and $150 per transaction, and this cost is incurred whether the company is purchasing $10 of paper clips or a $1 million computer system.

From an overall business and efficiency perspective, the corporate credit card procurement programs offered by banks and credit card companies (such as VISA, MasterCard, and American Express) make imminent sense. There are, however, potential negative sales/use tax issues that must be addressed in evaluating these programs. There are also significant federal tax questions relating to the documentation of deductible business expenditures and information reporting requirements. Corporate tax professionals need to tactfully raise these issues in order to fully inform management of the potential implications without being perceived as impediments to progress. The only way to positively communicate the Tax Department's perspective is to ensure that tax professionals are part of the team on the front end.

If a company has not yet considered a procurement card program, the tax executive may wish to seize the opportunity to introduce his or her company to the overall benefits that these programs offer. Tax departments are not normally viewed as a source of innovation for the day-to-day business processes. By taking the initiative, the Tax Department is likely to be more positively viewed as an innovator. Equally important, by taking the lead the Tax Department can ensure that the sales/ use tax issues are properly and expeditiously addressed.

How the Programs

Are Marketed

Corporate procurement card programs, are marketed to corporations as the "greatest thing since sliced bread" and as the solution to the low dollar/high volume purchase cost issue. The card companies promise, and can deliver, a purchasing process that is greatly streamlined and simplified. Usually, the Accounts Payable and Purchasing Departments can reduce resources (headcount) while achieving overall improved process efficiency and lower costs.

Procurement card programs are relatively new (having developed in the last two to three years), and it is important to understand that the card companies are primarily in the retail (individual consumer) credit card business. With this "retail consumer credit card" background and mind set, the card company's approach to sales/use tax issues may not be fully developed and is rarely explored in the marketing process. What the card companies often fail to appreciate is that the corporate client is in a much different role regarding sales/use tax. In most jurisdictions, corporations are designated to be the agents of the taxing jurisdiction to collect and remit sales tax from consumers. They also are required to self assess use tax on their own taxable purchases (where tax was not charged) and to remit such tax to the appropriate taxing authorities. In contrast, individual consumers are not routinely audited regarding sales/use tax either because of logistics or, in some states, because the law places the incidence of the tax squarely on the corporate taxpayer.

The tax issues confronting the corporate taxpayer are usually glossed over in the card company's marketing presentation as not a problem.' Other responses are that shortcuts and estimates can be used' to satisfy the taxing authorities who will be...