» 3 keys to avoid biggest pitfall of card-based transactions

3 keys to avoid biggest pitfall of card-based transactions

January 13, 2009 by Carol Katarsky
Posted in: Best practices, Hiring & training staff, In this week's e-newsletter, Internal controls, Latest news & views, Sales and use tax, Tax compliance

Using corporate cards is a great time-saver — and a budget-slasher for Accounting. But it comes with one serious risk. If you owe any sales taxes on a transaction paid for via a corporate credit or purchasing card — and the tax isn’t collected by the vendor in question — it can be a tricky liability to handle.

It’s a problem because a card statement may not give you all the detail you need to confirm what portion of the transaction is taxable, what sales tax rate applies, or even whether or not the vendor already collected the tax.

That leaves Accounting trying to do a lot of detective work come year-end.

To minimize the hassle to you, talk to upper management about implementing one of these three steps to improve compliance — and eliminate some of your headaches:

  1. Have your card issuer limit where and how cards can be used. Some of the criteria you can use are vendors in certain geographic locations, vendors that you know are required to collect tax, etc. This is the easiest option for Accounting, but purchasers may gripe about having limits placed on how they can do business.
  2. Allow cards to be used at all vendors — but make purchasers responsible for confirming that applicable sales tax is included in the final charge. This is a good option if you trust purchasers to have the experience — and the time — to actually do all the follow-up.
  3. If you can’t limit where/how cards are used, you need to have a procedure in place to check that there are no lingering sales tax liabilities on your books. Going line by line through each transaction is the safest, most thorough way to do so — but it takes a lot of time you probably don’t have. Alternative: You can probably use mini-audits or sampling techniques (where you base your total sales tax liability on a random percentage of transactions.) Just make sure you check with your state department of revenue to ensure the method you choose passes muster with their requirements.
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