Procure-to-pay, also known as purchase-to-pay or P2P, encompasses the steps organizations take to source and acquire the goods and services necessary for business operations. The tax implications for this process can be extremely complex, and the consequences for mistakes can be severe. That’s where Avalara comes in.
The Procure-to-Pay Process
Whether your business makes hundreds or thousands of purchases each month, the procure-to-pay process typically involves:
- Identifying a need for goods or services
- Submitting a requisition
- Getting the request approved
- Sourcing suppliers/vendors
- Obtaining quotes
- Creating purchase orders
- Approving purchase orders
- Confirming order fulfillment
- Reviewing invoices and resolving discrepancies
- Processing payment
- Storing invoices/statements
With so many moving parts, getting procure-to-pay right requires meticulous attention to detail, thorough documentation, and excellent organizational skills. Mistakes in the P2P process can lead to missed deadlines, increased costs, dissatisfied customers, and negative audit findings.
For instance, an error on a purchase order might delay approval, missing a payment deadline could postpone an order, and failing to scrutinize invoices might result in overpaying sales tax or underestimating use tax liability, leading to negative audit findings.
Tax Implications
As a seller, you’re responsible for collecting and remitting applicable sales taxes and validating exempt transactions by obtaining sales tax exemption certificates from your customers. Sales and use tax obligations also play a role in procure-to-pay.
To minimize sales and use tax errors when purchasing goods and services for your company, it’s best to:
- Track and verify invoices to ensure sales tax is correctly charged and exemptions are applied as allowed.
- Ensure vendors have up-to-date, valid exemption certificates for your company.
- Self-assess and pay consumer use tax.
Leveraging Technology for P2P Efficiency
Compliance regulations are constantly changing, making sales and use tax compliance increasingly challenging, especially with the advent of economic nexus laws.Managing the procure-to-pay process can be complex, but technology can enhance your P2P processes, making them more efficient and effective.
Avalara offers an end-to-end sales and use tax compliance solution, covering both sales and procurement. This makes managing sales and use tax much more manageable, ensuring compliance and reducing the risk of errors. Avalara AvaTax for Accounts Payable allows businesses to handle sales and use tax in real time. By using batch uploads of purchase transactions or prebuilt API integrations with many ERP and procurement systems, it identifies overpayments and underpayments of sales tax on your purchases. It applies the correct tax based on jurisdiction, taxability, and special rules, reconciles transactions, and automatically applies the use tax owed on your returns, helping to avoid fines and fees.
Below, we cover several ways that Avalara can improve your P2P efficiency by streamlining tax management.
Tracking and Verifying Invoices
As a buyer, you’re responsible for paying sales tax on taxable purchases unless you qualify for an exemption. If sales tax isn’t paid as required, you’ll be liable for consumer use tax. Therefore, it’s crucial to check your invoices to confirm that tax has been properly applied—or not, in the case of exempt transactions.
Understanding which purchases are taxable and which qualify for a sales tax exemption can be challenging due to varying taxability rules. The rules depend on various factors, including taxability laws, sales tax sourcing rules, the location of first use, and the method of delivery.
Manually verifying every incoming invoice is a daunting task, but sales and use tax software can simplify the process. Avalara AvaTax for Accounts Payable automatically checks each invoice against jurisdiction rates and rules, allowing you to detect vendor errors early. It also helps you identify trusted vendors—those with a history of charging the correct sales tax rate—so you can reduce the need for extra reviews.
Maximizing Sales Tax Exemptions and Vendor Exemption Certificates
Beyond ensuring that sales tax is correctly applied, it’s crucial to take advantage of available sales tax exemptions and ensure that exempt transactions are properly documented. Verifying that you weren’t charged sales tax on an exempt transaction is just as important as confirming the correct tax amount on taxable sales.
Keeping your suppliers’ exemption certificates up-to-date is also essential. When you don’t pay sales tax on taxable goods and services, you must provide the vendor with a valid sales tax exemption certificate or resale certificate. Vendors typically keep these documents on file, so you shouldn’t need to provide a certificate for every purchase.
However, it’s risky to adopt a “set-it-and-forget-it” approach with exemption certificates. They can become invalid if any information changes, and many certificates have expiration dates. Expiration dates for certificates vary by state and certificate type.
Tracking exemption certificates and their renewal dates can be challenging, both when collecting and storing them for your customers and when providing them to your suppliers. However, it’s crucial to keep track of them. The right technology can help prevent costly oversights. Avalara Vendor Exemption Management streamlines the creation and distribution of exemption certificates for your vendors at scale. You select the location and reason for the exemption, and it guides you through creating the correct form, adding an extra layer of validation. Your vendors can then access the certificates.
Simplifying Document Tracking and Reporting
Avalara Vendor Exemption Management also simplifies document tracking and reporting, so you’ll know when certificates are expiring and need renewal. You can even have it send an up-to-date certificate to every vendor missing one. Automating vendor certificate management can save you from headaches, financial losses, and legal issues.
Self-Assessing and Paying Consumer Use Tax
Consumer use tax complements sales tax, but it is self-assessed. Businesses must determine when and how much use tax they owe and remit it to tax authorities. This makes use tax a common focus for auditors, and mistakes are frequent.
Use tax can be tricky, with numerous potential pitfalls. These include self-inflicted problems like general ledger (GL) accrual errors, overlooking employee purchase cards, the movement of goods, or internal use of inventory. You might also accrue use tax on work completed but not yet invoiced, owe use tax on a zero-dollar invoice, or when a vendor fails to charge tax on a taxable transaction or charges an incorrect rate.
Ready to Simplify Your Tax Process?
We can help implement, integrate, and personalize your Avalara solution to provide the perfect fit for your company. If you’re ready to simplify your tax process with Avalara, contact us or schedule your free consultation today!