Financial institutions struggling with Use Tax Management.

5 Reasons Why Financial Institutions Struggle with Use Tax Management

Use Tax does not get the spotlight as its favorite cousin, the Income Tax. This situation has led to Financial Institutions either under-investing in the systems for Use Tax or altogether ignoring its “implications” and letting it run on auto mode. Of course, it is a recipe for disaster. The authorities have identified Use Tax as a new base for shoring up tax revenues. Moreover, with Financial Institutions (FI) already in regulatory crosshairs due to evolving perceptions, a Use Tax audit can push the FI into an unintended crisis.

Here are the five reasons why financial institutions struggle with Use Tax Management.

Lack of Investment and Oversight

The critical issue affecting FIs is the apathy of senior management, which is just not serious enough on handling Use Tax issues. It is currently considered a backwater of the tax framework, but FIs need to get ahead of the impending million dollar fines and extensive audits which are sure to follow very soon.

Multiple Jurisdictions

FIs geographical expansion is another thorn in the side. With various states, you get contradicting regulations and numerous forms, tax rates, and filings. The complexity is just too much for an in-house team to manage. The precise calculation of over or underpayment is too arcane and hiring state wise tax advisors is ineffective.

Moreover, conflicting opinions might derail the process of reconciliation.

Manual Processes

The FI’s Accounts Payable Team is burdened with archaic systems which are unable to handle the current complexity of the tax laws efficiently. Use Tax and manual verification of state wise tax rates, and you are looking at apparent chaos. Non-automation leads to duplication of work, no internal processes and clerical errors in filing and recording.

Item Level vs. Invoice Level

An invoice might contain different items having different Use Tax Rules and Tax Rates. Depending upon the number of services and goods being offered, an FI is looking at discrepancies due to item vs. invoice level calculations.

  • Are non-Integrated systems the income tax system integrated with the use tax?
  • Is use tax software for the Headquarter integrated with the use tax system for another state branch?
  • Is the accounts payable legacy IT infrastructure compatible with the ad hoc Use Tax solution or is the finance and accounting team dependent on non-integrated systems to transfer data and collate information?
  • Non-integrated systems pose risks of wrong information being submitted to tax authorities. Also, it could lead to the FI under paying or over paying Use Tax.

Conclusion

The FIs need to automate the current Use Tax management for ensuring that they are on the right side of the law, they are spending the correct tax amount, and they are not overpaying their tax lawyers/ third party for Use Tax management when a software solution can handle the processes with the help of the current F&A team.

Calculating the Return on Investment (ROI) is paramount for successful long term Use Tax Management.

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