In this Tax Tuesday webinar, Sovos tax compliance experts Antonio Di Benedetto and Ashley Brody address the complex requirements manufacturers face with sales and use tax filing. This one-hour webinar aired on February 14, 2017. Who should watch: - Tax managers - Finance managers - Accounts payable professionals - IT systems professionals who support tax compliance What you will learn: - Trends impacting manufacturers that are complicating the tax compliance and filing process. - Typical sales and use tax processes that lead to filing errors, inefficiency and audit risk. - How to leverage technology to improve and scale your process to stay ahead of surprises, incorrect filing and unplanned costs.

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T a x T u e s d a y W E B I N A R
Top 5 Sales and Use Tax Filing
Challenges for Manufacturers
…and how to fix them
P R E S E N T E R S
Antonio Di Benedetto – Director of Tax
Ashley Brody – Director of Compliance Services
F e b r u a r y 1 4 , 2 0 1 7

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SOVOS, the leader in Business-to-Government tax compliance
Sales & Use Tax
1099 Reporting
Beverage Alcohol
ACA
AEOI
E-Commerce Tax
Automation
LatAm
Compliance
VAT Reporting

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3
SOVOS, the leader in Business-to-Government tax compliance
4,500 clients operating in 120 different countries including nearly half of the Fortune 500
trust Sovos for their tax compliance and reporting

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Today’s speakers:
Ashley Brody
Director of Compliance Services
Sovos
Antonio Di Benedetto
Director of Tax
Sovos

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Agenda
• Manufacturing Trends that are impacting your business and
their effect on filing performance
• The Top 5 Challenges that lead to inaccurate filing
• How to rethink your process to ensure accurate and timely
filing
• Q & A

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Trends Impacting Manufacturers
…and why they are making Sales and Use Tax filing harder.

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Major forces for change
• Growth is at the top of manufacturing
leadership priorities.
• Orgs need to continually break in to
new markets in order to grow.
• Offering new products and new
services while expanding into new
geographies and new channels of
distribution is complex.
Source: http://www.nam.org/outlook/

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Major forces for change
Impact on the Filing Process:
• Expanded geographic footprint means more
jurisdictions, more rates and rules to manage
and more filing obligations.
• New products and channels create additional
complexity in the business for accurate nexus
determination and exemption management.
• Business growth, expansion and M&A activity
leads to challenges with decentralized processes,
system/data issues and more potential points of
error.
Source: http://www.nam.org/outlook/

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9 Major forces for change
More sophisticated customers are being driven by communication, knowledge
sharing. The demand for customized products is creating a new competitive
climate that is driving the need for faster innovation in the business.
Source: http://www.industryweek.com/future-manufacturing-2020-and-beyond

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Major forces for change
Impacts on the Filing Process:
• More and faster change in the business
• Drive for investment in new equipment
and production technology
• Resulting in the need for greater
efficiency and cost reduction in other
areas of the business
The need for speed and investment!
Source: http://www.industryweek.com/future-manufacturing-2020-and-beyond

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Major forces for change
Regulation and, in particular, indirect taxes
are expanding and under increased
scrutiny as states look to fill their revenue
gaps.
Regulators are:
• using more technology
• sharing more information and
• driving for more data in near real time
Source: http://www.industryweek.com/future-manufacturing-
2020-and-beyond
3 of the top 10 market challenges
relate to regulation

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Major forces for change
Impact on the Filing Process:
• Data needed and forms keep
changing at a more rapid pace
• Increased scrutiny from regulators,
and more automated systems that
will catch errors, trigger audits and
increase risk to the business.
Source: http://www.industryweek.com/future-manufacturing-
2020-and-beyond
3 of the top 10 market challenges
relate to regulation

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Influences on Filing
Process

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Top 5 Issues Creating Challenges
in Your Filing Process

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Typical Manufacturing Filing Process
Buy: Accounts Payable
Purchase Transactions:
PO, P-Card, Invoice, Other
Validation
Correction, Short Pay, Accrual
Data Consolidation
Review: Corrections /
Reconciliation
Filing:
Returns Prep / Transmittal
DOR
1
Invoices / Billing
Taxability:
Sales, Exemptions
Sell: Accounts Receivable
Audit Audit
Tax Systems:
People:
ERP
Taxability
Determination (Use, Direct Pay,
Vendor Validation)
AP
Tax
IT
Pur
RF XL
AR CRM
E com XL
AP CSRAR
Credit
Pur
DOR
2
DOR
3
DOR
4

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Challenge #1:
Rapidly Changing Obligations

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“I’ve been in tax for
30 years, and I’ve
never seen in my professional
life such evolution of tax
at this pace, ever.”
Chief Tax Officer

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Challenge #1 Keeping Up With Changing Obligations
Existing Rules and Regulations: Manufacturing Exemptions
1. How the items are used in the manufacturing process?
• Directly
• Exclusively (100%)
• Predominately (>50%)
2. Where are the items being put to use in the process?
• Existing facility
• New Facility
• Expanding Facility
3. What part of the manufacturing process are items being used?
• Production
• Conveyance
• Pollution Control
• Packaging
• R&D
• Quality Control
4. What are the types of qualifying items?
• Machinery and equipment/replacement parts/tools
• Raw materials
• Fuel energy used in manufacturing process
• Software and or services
5. What is the useful life of items used in manufacturing?

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2016 at a glance…
State and Local Rate Changes: 1,995
Total Rule Changes in our Determination Engine: 341,018
Total Form Changes in our Filing Solution: 296/1394 = 21%
“Too much time spent on regulation, compliance, taxes and not enough resources
dedicated to growth of the business.”
Electrical equipment and appliance manufacturer
National Association of Manufacturers Outlook Survey – Q3 2016

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Challenge #1 Keeping Up With Changing Obligations
Iowa – July 1, 2016
• The sales and use tax exemption for certain computers, machinery,
equipment, and replacement parts will be expanded to include “supplies.”
• The legislation also created new definitions for both “replacement parts” and
“supplies.”
Louisiana – Machinery and Equipment
• Increased state tax rate apply as of April 2016.
• 2% – April – June 2016
• 1% – July 2016 – June 2018
• 0% – July 2018 – March 2019
New Mexico – Five year phase-in of manufacturing exemption.
New rules, rates and regulations from states

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Challenge #1 Keeping Up With Changing Obligations
State Legislation
• Various states have enacted click-through nexus laws.
• Additional states have affiliate nexus rules
• Some state have enacted economic presence laws.
Federal Legislation
• Federal legislation enabling state governments to collect sales taxes and use
taxes from remote retailers with no physical presence in their state.
• Marketplace Fairness Act
• Online Sales Tax Simplification Act
• Remote Transaction Parity Act
Evolving sales tax nexus rules

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Challenge #1 Keeping Up With Changing Obligations
Louisiana
House Bill 30 expands the definition of “dealer” to include every person who manufactures or
produces tangible personal property for sale at retail, for use or consumption, or distribution, or for
storage to be used or consumed in a taxing jurisdiction:
• Click-through Nexus
• Intellectual Property Nexus
• Affiliate Nexus
• Nexus – Sub Ownership Interest
Alabama/South Dakota/Tennessee
• Alabama all remote vendors whose annual sales of tangible personal property in
Alabama exceed $250,000 to collect and remit Alabama’s sales and use tax.
• South Dakota – sellers who conduct 200 separate transactions annually or $100,000 in
annual sales to collect and remit sales and use tax as though that seller had a physical
presence
• Tennessee – will be enacted 7/1/2017.
Evolving sales tax nexus rules

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Challenge #1 Keeping Up With Changing Obligations
Technical requirements for compliance
State thresholds require online e-file mandates
• California requires e-filing
• Florida - $20,000 threshold for e-filing
States movement to new methods of compliance
• TN – moving to XML upload.
• SC – moved to XML upload.
• AZ – providing XML upload.
• PR – may move to XML upload.
Massachusetts Michigan Minnesota
New Jersey Pennsylvania District of Columbia
New York Ohio Oklahoma
Tennessee Vermont Connecticut

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24 Challenge #1 Keeping Up With Changing Obligations
Resources and expertise
• Team of tax experts to keep up with all the taxability, form, rate and technology changes.
• The team not only has to keep up with them, but maintain all new compliance.
Allocating time from IT department
• Competing projects and resources for IT team to implement such changes.
• Schedule time for IT to assist with last minute changes when already scheduled.
• If they cannot then your organization calculates tax incorrectly.

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Challenge #2: Changes in the Business

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Challenge #2: Change Management
• Geographically distributed organizations
• Expansion into new markets
• Growth of company
• Fractured processes
• Transactional data living in different places

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Challenge #3:
Managing Tricky Transactions

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Challenge #3: Tricky Transactions
Underpayment of tax to Department of Revenue
• A/R or A/P transactions handled outside of the normal course of operations
• Promotional use of inventory
• Under-reporting consumer’s use tax on purchase of manufacturing items
• Research and development rules vary by state
• Drop shipments – understand rules for various states
• Procurement cards – integration process challenging
Overpayment of tax to vendor on invoices
• Invoice validation – based on manufacturers specific circumstances.

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Challenge #4:
Accurate Upstream Determination

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Challenge #4: Accurate Determination
• Inability of existing technology to handle correct determination
• Data accessed from disparate systems
• Risk of under/over remitting, P&I, or potential audits
• Additional time and resources needed to correct inaccuracies

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Challenge #4: Accurate Determination
Exemptions Certificate Management
• Collection
• Validation
• Maintenance
• Reporting & Audit Defense

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Polling Question #5
How do you manage your exemption certificates?
a) Paper copies
b) PDF copies stored on a network
c) Third-Party certificate management solution
d) Other

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Challenge #5: The Human Factor

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Challenge #5: The Human Factor
Lack of controls
• Is the system capturing information and data properly?
• How is data collected or aggregated? What about data integrity?
Subjective determination / training & knowledge transfer
• A/P clerks managing taxability determination
• Procurement folks providing exemption certificates for manufacturing.
• A/R team managing exemption certificates
Inconsistent system updates
• Disparate systems and processes lead to inconsistent updates and errors.
• Lack of consistency increases audit risk.

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Challenge #5: The Human Factor
Process managed by variety of roles
• May have procurement, sales, A/P or A/R teams involved in the process.
• Tax team is not as involved in all of the day to day transactions and requests.
Training and knowledge transfer
• Getting tax team involved within each of these A/R and A/P processes and setting up
automation to safeguard against costly mistakes.
• Training and knowledge transfer within these teams is vital for continued success.
• Tax needs to revisit processes at regular intervals.

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Solutions!

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Filing Refined
Accurate
Filing
Centralize
Aggregate
Correct
Reconcile
Data
Single Source for
Determination
Integrated
Exemptions
Determination
Common Platform
Controls
Benchmarks
Discipline

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Getting the Data Right
Managing your systems and data

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Centralizing & Aggregating Data
Best Practices:
• Use a centralized tax platform to
manage the data – single source of truth
• Take control back from IT
• Reporting capabilities to look at totals
by state, transaction type, business line,
product line, customer, etc. – real time –
no waiting
So what’s the problem?

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The data you need
Data elements for needed successful filing:
1. Origin address information
2. Destination address information
3. Either gross + exempt
OR
taxable + exempt
Address components:
• Include at a minimum: city, state, zip
• Ideal: city, state, county, zip+4

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Reconciliation & Reporting
Better:
• Work with IT to build scheduled queries
with the fields you need
• Make corrections in one system
• Utilize reporting to help navigate the
“my numbers don’t match” problem
• Understand the workflow for easier
reconciliation issue triage

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Getting Determination Right
Managing changes and exemptions

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Multiple Systems Involved
Buy: Accounts Payable
Purchase Transactions:
PO, P-Card, Invoice, Other
Validation
Correction, Short Pay, Accrual
Data Consolidation
Review: Corrections /
Reconciliation
Filing:
Returns Prep / Transmittal
DOR
1
Invoices / Billing
Taxability:
Sales, Exemptions
Sell: Accounts Receivable
Audit Audit
Tax Systems:
People:
ERP
Taxability
Determination (Use, Direct Pay,
Vendor Validation)
AP
Tax
IT
Pur
RF XL
AR CRM
E com XL
AP CSRAR
Credit
Pur
DOR
2
DOR
3
DOR
4

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The Road to Better
Understand the causes:
• Where does all of my data live? Is that necessary?
• System (rate/rule) out of date?
• Incorrect customer setup?
• Unfamiliar jurisdictional requirements?
• New product?
• Transactions won’t reconcile?
• Need to get to the root cause!

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Single-Source Determination
Best Practices:
• Use a centralized tax platform for determination
• Use determination for all transactions (AR&AP)
• Fully integrate your exemptions with a centralized
database, validation rules, transformed certificates, and
reporting capabilities

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The Road to Better
Better:
• Start with determination
• No tax engine? Have a rate file and taxability matrix in place
• Digitize, organize, and update exemption certificates

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Operating with Discipline
Implementing practices to help you remain diligent

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Limit the “Human Factor”
Best Practices:
• Utilize a common platform and reports
• Limit involvement from others – mainly IT
• Educate teams, set benchmarks, and monitor the process
• Conduct regular reviews (nexus, product taxability, etc.)

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Take-aways
• Understand where your business is going – products,
geographies, system changes, etc.
• Use that knowledge to plan your approach – taking
motivations of all into consideration
• Recognize that compliance is never done – systems and
processes need to be flexible
• Centralize as much as possible to improve control

50. T H A N K Y O U
Watch the on-demand replay of this and
other compliances webinars at
http://sovos.com/education/webinars
W W W . S O V O S . C O M