Friday, August 07, 2009

You Must Build a Taxability Matrix

In a previous article, I mentioned that you should have a taxability matrix. This will help your purchasing agents, requisitioners, and anyone else who needs to decide on the taxability of a purchase.

The matrix will be a listing of items that you typically purchase, and the taxability of them based on these factors. This isn't easy. Few people like to write policies and procedures, but this is one of those you really should have. This is the core of any sales tax manual. It'll accomplish a few important things:

It gives your people the information they need to determine the taxability of a purchase, whether they're in Purchasing or some guy out in shipping who needs to order forms. All they have to do is look at the matrix and they can figure out what to check on the "taxable?" box on the requisition or PO.

The matrix gives you the ability to get changes out to these folks as well. Let's say you discover a mistake, find out from sales that you're dealing with a new state, a new law is passed, etc.; you simply republish the matrix. And if you're hip, groovy, and in the 21st century, this isn't even on paper, it's on your intranet someplace.

The matrix will gives you something to hand to the auditor that says, "here is how we do it." Instead of having to pull 10,000 invoices to figure that out, the auditor may need to pull a lot fewer since they can see how you say you do it. They just have to test to see if the procedure is being followed. They can argue if a particular item on the matrix is correct or not, but if you've done the backup research as you were developing the procedure, you're going to be so prepared for any argument.

You know, I kind of feel sorry for any auditor who walks into the buzz-saw of an organization with a good taxability matrix.
So, aside from inertia and the overwhelming power of procrastination, why aren't you developing that taxability matrix?

This article has been written from the perspective of the buying side of the business. A similar taxability matrix should be developed for what your company sells. I'm guessing it'll be somewhat shorter since most companies sell a smaller variety of goods and services than what they buy, and certificates may make the job easier. But developing the protocol still should be done.

Sales Tax Guy

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