Procurement cards and tax compliance: bridging the gap: a report of the Steering Committee Task Force on EDI Audit and Legal Issues for Tax Administration.

The following report on procurement cards was released in June 1997 by the Steering Committee of the Federation of Tax Administrators' Task Force on EDI Audit and Legal Issues for Tax Administration. The Task Force is composed of representatives from the Federation of Tax Administrators, TEI, the Committee on State Taxation, the Institute of Property Taxation, and the Multistate Tax Commission. The Task Force released in March 1996 its Model Recordkeeping and Retention Regulation, which was reprinted in the May-June 1996 issue of The Tax Executive, and in February 1997 released its Guidelines for auditing electronic Data, which were reprinted in the March-April 1997 issue of The Tax Executive. TEI thanks its members and the other individuals who served on the Steering Committee and work group that developed the procurement card report, including Barbara Barton of Electronic Data Systems Corp., Bill Zornes of Western Auto Supply Company, Brian E. Andreoli, formerly of Boehringer Ingelheim Pharmaceutical, Inc., and now with KPMG Peat Marwick, Mark D. Loftis of Northern Telecom Inc., Barbara A. Timek of AT&T Corporation, and Charles J. Wooding of First Chicago NBD.

Foreword

The Task Force on EDI Audit and Legal Issues for Tax Administration (Task Force) was formed to coordinate efforts between the business community and tax administrators in analyzing and addressing the issues posed for tax administration by electronic data interchange and related business processes. The Task Force is comprised of representatives of the Committee On State Taxation (COST), Institute of Property Taxation (IPT), Tax Executives Institute (TEI), Multistate Tax Commission (MTC), and Federation of Tax Administrators (FTA), and commissioners from several state tax administration agencies. This report is the third in a series of reports to be published by the Task Force on electronic commerce and tax administration.

Through the Task Force process, the Electronic Business Processes work group was formed to examine the tax administration and compliance issues associated with certain emerging business processes, including the use of corporate procurement cards. A large group of taxpayer representatives and tax administrators as well as representatives of procurement card issuers gave freely of their time and effort to understand the issues involved and to identify approaches which would meet the needs of both taxpayers and tax administration agencies and which were still reflective of reality in the procurement card field.

This report is the product of that effort. It contains a description of procurement card operations and benefits and identifies the primary sales and use tax administration and compliance issues involved with their use. It examines current practices among card users and tax agencies with respect to procurement cards and concludes by providing a series of recommendations for businesses using procurement cards, tax agencies, card issuers and vendors accepting procurement cards that are intended to address the tax administration issues raised by procurement cards. As with the report itself, the recommendations are premised on a need for all parties to work together to resolve the issues.

The Steering Committee wishes to acknowledge the contributions of all individuals who devoted their time and effort in developing and refining this report.

Stanley R. Arnold, Steering Committee Chair

Commissioner, New Hampshire

Department of Revenue Administration

Introduction

U.S. businesses are expanding rapidly the use of "corporate procurement cards" or "procurement cards" in purchasing goods and services for their own use and consumption Procurement card programs can be effective in reducing substantially the costs associated with such purchases when compared to traditional purchasing practices. They do, however, raise certain tax compliance and administration issues for both taxpayers and tax administration agencies. These issues largely revolve around the availability of adequate information to document that the appropriate amount of sales or use tax was paid on purchases made with procurement cards. Developing adequate procedures to address these issues and to prevent tax documentation procedures from hindering the implementation of procurement card programs will require cooperation among all parties involved -- taxpayers, tax administration agencies and procurement card issuers.

The Task Force on EDI Audit and Legal Issues for Tax Administration(2) has developed this "White Paper" with four objectives in mind: (1) improve the understanding of procurement card programs and their operations; (2) identify and analyze the tax administration and compliance issues associated with such programs; (3) review steps that taxpayers and state tax agencies have taken to address these issues; and (4) recommend certain actions to taxpayers, tax administration agencies, vendors/suppliers and procurement card issuers that will be helpful in addressing the administration and compliance issues in a fashion which meets the needs of all parties.

Procurement Card Operations

Mechanics of the Cards. At the most basic level, procurement card programs replace the various steps in the traditional purchasing process (a requisition, followed by a purchase order, followed by an invoice, followed by approval of the invoice, followed by a payment to the vendor) with an authorization to an employee to use a charge card to procure necessary goods and services. Procurement cards are corporate charge cards issued to specific employees of a business after that business enters into a contract with a card issuer involving use of the card, financial responsibility, billing, payment, etc.(3) The user company designates the employees authorized to use the cards for making necessary business expenditures and places any transaction limits or use restrictions on the cards and employees. Limits may be placed on transaction size, types of purchases, vendors which may be used and the like. These limitations will vary from company to company depending on a variety of factors. including the nature of their operations, their business needs, legal requirements, and the extent to which they want to replace traditional purchasing operations with procurement cards.

At the point of sale, the procurement card transaction operates identically to a traditional charge card transaction. In an "over-the-counter" transaction, the card user presents the card -- in lieu of cash, check or purchase order on account -- and then signs and receives some form of documentation of the transaction.(4) A substantial portion of procurement card transactions are telephone transactions where the card user provides the card number to the vendor, and the goods and accompanying documentation are shipped according to the customer's instructions.(5)

Payment to the vendor is made by the card issuer or merchant processor(6) in accordance with contract terms between those parties. The issuer, in turn, receives payment from the company of the card user. Card issuers bill the user companies on a periodic basis, and a single, centralized billing and payment is made for all transactions made by all individual card users in the company. Procurement cards differ from company-sponsored "travel and entertainment" (T&E) cards where the individual card user is typically responsible for payment.

Card issuers also provide a variety of periodic information statements on procurement card transactions to the users, most commonly on a monthly basis.(7) These statements may be issued to individual card users, individual plant locations or departments, or on a company-wide basis. They may include the transactions of several individual card users or all users in a company. Statements may be provided in paper or electronic form.

Procurement cards are used by companies to purchase a wide variety of goods and services necessary to their operation.(8) Traditionally, procurement card programs have focused on "high volume/low dollar" transactions which account for a large proportion (by number) of an enterprise's purchase transactions, but a relatively small amount of the purchasing volume (by dollar) and would, therefore, have relatively high "per transaction" costs under the traditional purchasing process. As the programs become more widely used and accepted, however, the types of purchases for which they are utilized continue to expand, depending on the business needs and desires of the user company.

Procurement Card Benefits. Procurement card programs can substantially reduce the costs of purchasing operations, particularly for "high volume/low dollar" transactions. One source(9) estimates that 60 percent of all the individual purchases in medium to large companies average less than $500 in value and that 30 percent of these purchases are less than $100 per transaction. Collectively, purchases of less than $100 may account for less than 5 percent of the total dollar-volume of company purchases, yet the fixed internal processing costs of these transactions can be $120-150 each, regardless of the value of the item purchased. A procurement card program can save as much as 35-40 percent on overall internal purchasing costs.(10)

These dollar savings are achieved in a number of ways. Purchasing lead time is reduced by avoiding involvement of purchasing and accounts payable staff and avoiding the costly and time-consuming paperwork of requisitions and purchase orders. Also eliminated is the need to deal with multiple invoices and multiple vendors in a single-payment cycle. In short, procurement cards can effectively simplify and streamline the procurement process and allow a business to shift resources previously devoted to paper processing and control to other more "value-added" tasks. In addition, suppliers or vendors which accept procurement cards also benefit from reduced paperwork and more rapid payment.

Tax Compliance...