Effectively addressing sales and use tax requirements for a U.S. card program is one of those foundation elements that can nag at an organization for years. This is why Recharged Education invited industry veteran Robin Anderson to share her insight.
Read moreU.S. regulatory compliance issues.
How well does your organization comply with U.S. regulatory requirements like 1099 reporting, sales and use tax, and OFAC? It is safe to say that few people would declare regulation as the favorite part of their job, but non-compliance can mean fines, penalties, and/or increased scrutiny from regulators. As the lead researcher for AP Now’s 2017 survey on regulatory compliance issues, I saw firsthand that there is room for improvement. As a payment professional, you can help your organization step up its efforts. Following are tidbits from AP Now’s survey results, including where Commercial Cards fit into the regulatory picture.
1099 Reporting
Commercial Cards are a win here. To reduce the burden of federal 1099 reporting for domestic payments, expand the usage of Commercial Cards—regular cards and/or electronic payables (e.g., Virtual Cards). As a reminder, the regulatory responsibility shifted several years ago, adding to the benefits of card usage. As stated within www.irs.gov, “Under section 6050W of the Internal Revenue Code, payment settlement entities (merchant acquiring entities and third party settlement organizations) must report payment card and third party network transactions. This reporting requirement began in early 2012 for payment card and third party network transactions that occurred in 2011.”
For your reportable non-card payments, do what you can to minimize the pain. Per the AP Now survey results:
- Among organizations that do TIN matching, 81% receive fewer than 10 B-Notices annually.
- While about half of respondents’ organizations use the IRS TIN matching system at some point, only 14% follow the best practice of doing so throughout the year when new vendors are added and in conjunction with annual reporting.
Sales and Use Tax
Some survey respondents volunteered that their biggest problem related to tax compliance is card payments. One person commented that, with P-Cards, it is difficult to determine what is being purchased and where it will be used. Further, survey results indicate that about one-fifth of organizations generally disregard or exclude card payments from their use tax accrual process.
Lack of an effective accrual process puts your organization at risk of a use tax assessment that could reach or exceed $1M; see the related blog post by Recharged Education, including tips for improving your approach. Begin by confirming who is responsible for tax compliance for your card program. Do not assume that the tax group is handling it.
OFAC
The Office of Foreign Assets Control (OFAC) maintains the Specially Designated Nationals and Blocked Persons list (“SDN list”), which people also refer to generically as the OFAC list. It reflects individuals, companies, groups, etc. for which assets are blocked, and U.S. persons and companies are generally prohibited from dealing with them. For OFAC resources, visit the website at: https://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx.
Per the survey results, 40% of organizations check the list, which is promising. Awareness appears to be growing. The best practice is to check the list for each new vendor, regardless of payment method, and keep related records of your efforts. Has your organization assigned this responsibility to a specific department?
Final Thoughts
As recommended in the AP Now report of survey results, combatting the challenges begins with actively pursuing channels to better understand the regulatory requirements and determining where your organization falls short. From there, incorporating knowledge of the requirements into best practices is the right path. This includes:
- Assigning related responsibilities
- Providing training
- Updating policies and procedures as needed
- Exploring technology options when warranted
Survey Results
To purchase the complete survey results, visit the AP Now website: http://www.ap-now.com/products/item100.cfm.
About the Author
Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With more than 15 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more…
Subscribe to the Blog
Receive notice of new blog posts.
Six myths about tax compliance.
Hindsight can be 20/20 regarding Purchasing Card programs and tax compliance. Many organizations overlook tax or unknowingly place their trust in myths. Either way, a big crash at the end of a tax audit is likely. Tax veteran Greg Anderson, Application Design Resource LLP, wants to spare organizations such pain, so he shared common myths with me, based on his 20+ years of experience in this field.
Myths
Our P-Card program is too small to worry about.
The card program should never be swept aside. Even when a program starts small, it usually grows, becoming a bigger headache when tax audits end with poor results, such as assessments and penalties.
The tax department handles this.
This is often said by procurement or accounts payable (depending on who manages the card program), but nothing could be further from the truth if the tax department was never consulted. Unfortunately, most of the time, the card program management team does not have any relationship with the tax folks and tax compliance slips through the cracks.
Our bank/issuer sends us tax reports.
There is a kernel of truth here, but... Issuers typically provide reporting related to Level II data, but such reports are not relevant to tax auditors since the data represents tax paid versus tax that should have been paid.
The remaining three myths stem from management hopefulness or lack of awareness about actual purchasing activity by cardholders:
- Merchants pass a tax amount on all of our transactions.
- We only buy from local merchants.
- Our cardholders only buy items for which merchants collect tax.
An organization’s situation is seldom this rosy, so just assume none of these things apply.
Organizations often accelerate P-Card usage without considering tax compliance, but the issue will catch up with a program.
Taking Action
Having an effective tax strategy begins with communication. Ensure you have clear answers to:
- Who is responsible for our P-Card tax compliance?
- What is our tax strategy for the P-Card program
- What have tax audits revealed?
- How can we improve?
See a previous blog post that summarizes key tax points and includes links to additional tax content. If you are seeking a more automated solution to tax management, Recharged Education can provide guidance; please submit a contact form.
“You can’t help but... with 20/20 hindsight, go back and say, ‘Look, had we done something different, we probably wouldn’t be facing what we are facing today.’”
About the Author
Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With more than 15 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more…