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The Automation of the UseTax Determination

John KennedySr. Business Consultant Sabrix, Inc.

Agenda

Common Challenges of Handling Use TaxDeterminations

Traditional Approaches to ManagingDeterminations

Next Generation Tax Solutions

Benefits of Automation

Things to Consider when ContemplatingAutomation

Steps to a Successful Automation Project

2

Challenges Reside in Many Areas

Constantly changingenvironment

Manuallyintensetransactions

Multiple transactiontypes and points

Time-consumingfiling processes

Limited separationof duties

Diverse decisionvariables

Multiple applicationsand platforms

Many business entitiesand regions

Business Process, Systems & Tax Environment

Legal Entities ?

APOperations US EU LA ?

Tax Systems Custom/Native ExcelManualTax App2Tax App1

AribaSFACRM

BusinessSystems

Oracle ?HomeGrownLegacySAP

Applications Quote

Post-Purchase ProcessSales Process Purchase Process

Inv AR OE Req PO AP FA Proj Inv . MoveERS JE

✓

Interfaces

✓

✓

✓

= Tax decision-related codes, programming or logic✓

3

Data Entry Business Applications Software Interfaces Tax Engine

Traditional Transaction Logic and Process Flow

✓✓✓✓

IF @Customer = 'NULL' IF @Product = 'NULL' SELECT CompanyName , OrderDate , ProductName , Quantity , Item.UnitPrice FROM Customers AS Customer JOIN Orders AS [Order] ON [Order].CustomerID = Customer.CustomerID JOIN [Order Details] AS Item ON Item.OrderID =OrderDate, ProductName FOR XML AUTOELSE

YOH1-47443Tech12C1A1

YAZ4-87665Bund76C3A1

NCO4-56477Svcs14C3L1

YCA7-98977Tech68C5B3

NNY3-27848Tech68C1A1

ExCodeCodeCode

Geo-Prod-Cust-

= Tax decision-related codes, programming or logic✓

Challenges of A Typical Month

Prepare PLRRequest

Prepare & Review270 Returns

Document PolicyChanges for ITTo Implement

Train New AP Hires with

Updated Matrix

Research Proposal Structure

w Finance

Meet with State Auditor on

Sampling Method

SUT Professional

Over 59 Tasks to be Managed Completion of Returns

Required Each Month –Perpetually

Reliance on AP, AR, & ITNecessary to Complete Tasks

Partial Data Residing withinMultiple Sources

Manual Review Required Forcomplex transactions

Lack of time & planning &analysis Tools to be proactive

4

Juggling Tasks – A Break Out of Effort

MonthlyCompliance

59%

Planning, Training& Management

6%

Audits &Controversies

24%

FinancialReporting & Forecasting

11%

24%

11%

6%

59%

Financial Reporting & Forecasting Audits & Controversies

Monthly Compliance Planning, Training & Management

Areas of Effort

MonthlyCompliance

Planning,Training &

Management

Audit &Controversies

FinancialReporting &Forecasting

1. M&A Planning

2. Training Non-Tax Personnel

3. TransactionStructurePlanning

4. Managing TaxPersonnel

5. Non SUTWork:(Property Tax,BusinessLicense Tax &Excise Tax)

1. Tax Reserves &Provisions

2. TransactionAnalysis & TaxCredit Studies

3. Sarbanes &Financial AuditReviews

4. Reconciliationof Tax Accounts

1. Audit & IDRManagement

2. Audit Data &DocumentRetrieval

3. AuditResearch &Negotiation

4. Refunds &Credits

5. Audit Appeal& Controversy

1. Data Collection

2. Consolidation& Reconciliation

3. ExceptionReview &ManualAdjustments

4. Preparing TaxReturns

5. PreparingPayments &AccountingEntries

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Compliance - Opportunity Cost

Are Your Processes Costing You More Than They Should?

IT CostsManual Tax Processes

and Tax Errors

Penaltiesand Interest

DivertedCapital

Transactions

•Business Region responsible for taxsolution•Ongoing Custom API Development•Custom VAT Solution

•Audit Expense•Tax Research•Tax Table Maintenance•Exemption Management•Tax Rate Lookup/ Errors•Tax Training

“Simply Map Items”, an ILLUSION!

1. Canned SoftwareDelivered via Email

2. CAD/CAM MFG.Software

3. Custom Software

1. Canned SoftwareLicense via Electronically

2. CAD/CAMManufacturing Software

3. Custom Software

1. Unique productcode isreceived foreach line item.

2. Unique product code ismapped to Tax Solution’sUnique product code toarrive at correct tax.

6

REALITY - The World Isn’t Perfect

1. SOFTWARE

2. SOFTWARE

3. SOFTWARE

1. Canned SoftwareDelivered via Email

2. CAD/CAM MFG.Software

3. Custom Software

1. No unique productcode is receivedfrom the sourceapplication.

2. How do I fullyautomate thedetermination?

MAPPING ALONE ISN’T THE ANSWER

Allocations

The need to allocate a single item over several taxing jurisdictionsor to unbundle an item into several line items for tax treatment.

Sample usesMass mailings. Determine the most accurate tax for mass

mailing by using the addresses of the of the mailing recipientsinstead of a single address.

Bundles and Kits. Where bundles or kits are documented onan invoice, but represented as a single invoice line – theremay be a need to determine tax based on each componentand return all taxes back to the billing system.

Kit

Computer

Software

Training

Allocation

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Additional Challenges: Non – Traditional Fees and Taxes

More than just a Sales or Use Tax is Needed on the Transaction

Examples: Battery Fees in California Industry-specific excise taxes (fuels, alcohol, tobacco, etc.) Hospitality taxes Insurance Premium Taxes

Achieving Consistent Accuracy

Assess and report the appropriate tax ateach point in a transaction’s lifecycle

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II. Traditional Approaches toManaging Determinations

Common Approaches

Manual Processes

Subjective anderror prone

Time-consumingand expensive

Little control overthe use of policies

Extremely difficultto scale,collectively

ERP Applications

Cost-intensivecustomization

Difficult to keeptimely, up-to-date

Application- andplatform-dependent

Poor separationof IT/Tax duties

Tax Calculators

Process- ortransaction type-specific

Use of decisiondata is fixed,limited

Focused oncalculation vs.determination

Difficult orimpossible to audit

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Milestones in Transaction Tax Automation

ManualManualCalculationCalculation

Tax CalculationTax CalculationEnginesEngines

GlobalGlobalTax SolutionTax Solution

Automation WithAutomation WithERP Tax TablesERP Tax Tables

and Codesand Codes

Reduce the Cost of ComplianceReduce the Cost of Compliance

Create Complete Audit TrailsCreate Complete Audit Trails

Tax Professional Control and VisibilityTax Professional Control and Visibility

Integrate Seamlessly into the BusinessIntegrate Seamlessly into the Business

Respond and Manage ChangeRespond and Manage Change

Issues with the Traditional Approach

Manual Administration controlledby AP, not the tax dept

Decentralized Approach Multiple solutions across

the company Custom-built integration with

IT support

Old

Way

Method Result

Risk non-compliance/Exposure Dispersed, inconsistent records/

time consuming consolidation BIG dependency on IT No leverage across the company

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III. Next Generation TaxSolutions

New Approach to Automating Use Tax

1. Centralized Management of Tax Policy

2. Ability for Tax Professional to Set Use Tax Policy

3. Single Source Repository of Transaction Data

4. Consolidated Reporting Mechanism

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Data Entry Business Applications Software Interfaces Tax Engine

Traditional Transaction Logic and Process Flow

✓✓✓✓

IF @Customer = 'NULL' IF @Product = 'NULL' SELECT CompanyName , OrderDate , ProductName , Quantity , Item.UnitPrice FROM Customers AS Customer JOIN Orders AS [Order] ON [Order].CustomerID = Customer.CustomerID JOIN [Order Details] AS Item ON Item.OrderID =OrderDate, ProductName FOR XML AUTOELSE

YOH1-47443Tech12C1A1

YAZ4-87665Bund76C3A1

NCO4-56477Svcs14C3L1

YCA7-98977Tech68C5B3

NNY3-27848Tech68C1A1

ExCodeCodeCode

Geo-Prod-Cust-

= Tax decision-related codes, programming or logic✓

The New Approach

New Way of Automation

Automated centralized taxcompliance

Easy to use web based interface Tax Professional control over

company specific positions Accurate tax determination

automatedwith ERP solutions for sales, useand VAT

Tax professionals easily respond tochange

Complete audit trails, including meetingSarbanes-Oxley requirements

Global visibility and control over taxmanagement

Tax planning and optimization, trendanalysis, and transaction modeling ofkey business decisions

New

Way

Method Result

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Consistent control

Manage tax processing and compliance,independent of application, entity or country

Configuration without coding

Non-invasive application connections

Tax Policy Clearly Identified & Results Stored Rates & Rules Tax Policies Audit History

Enables separation of duties Tax controls IT operations

Browser-based configuration without coding

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Real-time compliance reporting

Consolidated reportingand transaction auditsystem

Automated dataintegration for tax filing

Single application toglobal deployment

“Simply Map Items”, an ILLUSION!

1. Canned SoftwareDelivered via Email

2. CAD/CAM MFG.Software

3. Custom Software

1. Canned SoftwareLicense via Electronically

2. CAD/CAMManufacturing Software

3. Custom Software

1. Unique productcode isreceived foreach line item.

2. Unique product code ismapped to Tax Solution’sUnique product code toarrive at correct tax.

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REALITY - The World Isn’t Perfect

1. SOFTWARE

2. SOFTWARE

3. SOFTWARE

1. Canned SoftwareDelivered via Email

2. CAD/CAM MFG.Software

3. Custom Software

1. No unique productcode is receivedfrom the sourceapplication.

2. How do I fullyautomate thedetermination?

MAPPING ALONE ISN’T THE ANSWER

Next Generation Approach

1. SOFTWARE

2. SOFTWARE

3. SOFTWARE

1. No unique productcode is receivedfrom the sourceapplication, butthere is additionaltransaction data!

1. Canned SoftwareDelivered via Email

2. CAD/CAM MFG.Software

3. Custom Software

SHIP TO is Null

DEPT is MFTG

Vendor is IBM

2. Additional transactiondata is analyzed todetermine the exactSoftware type.

3. Each line isautomaticallymapped to thecorrect softwareproduct toprovide accurateresults.

Utilize All information About The Transaction, With OrWithout A Product Code, To Fully Automate TheDetermination And To Provide Accurate Tax Calculation

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IV. Benefits of Automation

Key Requirements & Outcomes of True Automation

1. Consistent Accuracy All tax policies, rates, rules & logic are enforced by a single tax application

2. Consistent Control Tax professionals control all tax decisions

3. Consistent Efficiency Single source of record for all transaction tax liabilities efficient monthly filings, reporting,

analysis and audit support.

4. IT Independence Tax professionals configure, manage and test tax requirements in the tax application vs.

IT coding, programming and testing tax requirements.

5. Business Process, People and Systems Independence Support automated transaction tax determination, calculation and recording for all

Sales, Purchase & Post-Purchase transactions, and all business systems & applications.

6. Consolidation Record historically rather than referentially all transaction and tax details in a

consolidated audit database.

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Business Value Added

Accurate tax rates through automatic system data feeds

Accurate and timely tax expense management reports

More Efficient with legal guidelines Sarbanes-Oxley Jurisdictional Audits

Centralized tax decision making processes in Purchasing

Business Value Added (cont.)

Improve or re-centralize plant tax compliance processes

Digitize certificate management

Build best tax practices

Facilitates execution of tax policy

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Consistent Efficiency

Empower Tax, IT, and Finance professionalsto better apply their true expertise

V. Things to Consider whenContemplating Automation

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Identify & Weigh

I. Business Reasons – Efficiencies, Sarbanes…

II. Tax Reasons – Accuracy, Audit Response Capability,Returns Preparation

III. Scope – Sales, Use, VAT? 1 Division? Entire Company?

IV. Budget – Funding, Yearly Renewals, License Costs, ROI

V. Timing – Acquisition? ERP Upgrade? Start of New Year?

VI. Buy In – From IT? AP? …

VII. Assitance of 3rd Party Advisor?

Approaching Tax Determination Logic & Design

WHAT?

WHO?

HOW? WHERE?

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The Four Key Areas Of TRUE Tax Automation

1. Determination

Taxable ornon-taxableand why?

2. Calculation

If taxable,what rateapplies andto whichparts?

3. Recording

Have wedocumented allof thetransactiondetail tosupport ourmonthlycompliancereporting andaudit defense?

4. Filing

How muchtax needsto bereportedand paid toeachauthority?

This is the Critical

Step

VI. Steps to a SuccessfulAutomation Project

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It’s a Project – Go at it With a Plan

I. Plan and Schedule resources of Tax, IT, AP for input, &other relevant groups.

II. Work with a clearly defined Statement of Work includingRoles & Responsibilities, expected time commitment foreach step in the plan, etc.

III. Engage 3rd Party consultants if desired.

IV. Consider a Phase in Approach vs. Big Bang

Understanding Your Tax Requirements

1.Understand Your Products and Services2.Understand Your Company’s Tax Footprint3.Identify Exceptions in Each Authority For Your Products and Services4.Categorize Exceptions By

Product – (What)Person – (Who)Location – (Where)Usage – (How)

5.Identify and Document Tax Determination Requirements6.Identify and Document Data Requirements To Support Tax Determinations--------------------------------------------------------------------------------------------------------------------------7.Identify and Document Tax Configuration Steps To Support Desired Outcomes8.Configuration9.Testing10.Adjustments11.Production

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Deployment

Efficient Implementation Process:

Phase II Configuration

Phase III Integration

Phase IVValidation

Deployment Time

Phase I Tax Policy &System Study

For more information, please contact:

John Kennedy – 847-864-3104john.kennedy@sabrix.com

Debbi Boone – 847-328-3763debbi.boone@sabrix.com

Cory McLure – 503-924-5033

cory.mclure@sabrix.com