It is a well-know axiom that purchasing executives, particularly in the retail industry, are trying to squeeze every conceivable dollar out of the supply chain. They have focused on process improvements such as total quality management, just-in-time, and Six Sigma. Further they are increasingly seeking to manage and integrate diverse functions to achieve organization-wide supply chain objectives. One of the critical supply chain management objectives is the saving of dollars for the organization and its customers. Particularly in the retail industry, where price is often the key factor in a purchasing decision, cost management is often the key objective. For certain purchases and operations there are "tax efficient" structures that should be considered. However, frequently, such structures are not considered. This article will examine those structures, discusses why such structures are often not utilized and also how utilizing such structures can provide a company with a competitive advantage.
What Is Tax-efficient Procurement?
If we were to discuss what an efficient supply chain means, most Supply Chain executive vice presidents (EVPs) would reference concepts such as driving enterprise cross-functional integration; producing the highest availability at optimal inventory carrying levels, transportation and warehousing investment; driving increases in economic profit; and increasing shareholder value.
Conversely, if we were to ask about "tax efficient procurement" we would likely get a blank stare from the same Supply Chain EVPs. Why? Because the integration of tax savings and efficiencies in the context of procurement are often not well understood by either procurement executives or corporate tax departments. While we could enumerate a myriad of tax decisions that impact supply chain efficiency, for purposes of this article we will focus solely on sales and use tax decisions.
Where Do Sales Tax Difficulties Arise in Procurement?
Primarily, tax inefficiencies emanate from the procurement of non-inventory items (often referred to as internal use assets or indirect purchases). To understand how these inefficiencies arise we need to explain the basics of sales tax mechanics.
The Basic Mechanics of Sales Taxes
In general, when a company purchases inventory items (items it intends to resell to third parties), such purchases are made under a resale certificate (a form provided to the vendor with the relevant tax identification information and signed by the appropriate corporate officer). A properly completed and executed resale certificate provides the vendor assurance that the items purchased are for resale and, as such, no sales tax need be collected.
When non-inventory items are purchased, (e.g. fixed assets, operational software, supplies) tax must either be paid to the vendor at time of purchase or use tax must be self-accrued and remitted by the purchaser. If the vendor charges tax, it must make certain assumptions about which state and localities the purchased assets will be used in and, accordingly, charge tax based on its assumptions regarding the locale of usage.
If a vendor makes a mistake as to the location of usage, the proper tax rate or even the taxability of the purchase, for most jurisdictions, a refund claim for incorrect tax amounts must be made through the vendor (not directly by the company to the taxing jurisdiction).
Almost all states have a corollary to "sales" tax: "use" tax. In general, use taxes apply in situations where the vendor either was not obligated to, or did not collect sales tax on, an otherwise taxable purchase of goods, services or taxable intangible licenses. Use tax has several nuances. Use tax can (although not often) be imposed at a different rate than sales taxes. Further, use tax is typically "self accrued" by the purchaser, and as such, the determination of the proper taxing jurisdiction(s) and rate(s) is left to the purchaser.