Call 866-513-CORP or visit SalesTax.com

Processing Tax-Only Credit Adjustments in SAP® Using CCH® CorpSystem® Sales Tax Office

CorpSystem® Indirect Tax Solutions

2

Introduction

CCH’s Sales Tax Office (STO) Solution for SAP Systems extends and enhances the integrated tax processing logic of STO, providing sales and use tax calculation options and current tax rates and taxability to your organization. In addition to those capabilities CCH offers productivity tools that enhance the information communicated between the two products. These tools allow you to easily interact with the STO server directly from the SAP via standard Remote Function Calls (RFC’s). Three of the tools are:

1. Materials Movement — Easily adjust inventory used internally instead of being resold ensuring compliance.

2. Spot Reports — Provides enhanced reporting combining over 150 SAP tables with STO data into a single reporting database. Reports can be customized using drag and drop functionality — eliminating the need for IT intervention.

3. Tax-only Debits and Credits — Allows for adjustments to taxability of existing invoices, automatically posting to logs and reports.

This whitepaper explores the Tax-only Credit aspect of the third productivity tool, describing the need and mechanism that STO uses to enhance SAP functionality and your technology investment.

Generally speaking, the need to generate a “tax-only credit” comes as a result of having to adjust (“wash-out”) a previously imposed tax because at the time of the original transaction, statutorily and systematically, there wasn’t a supportable reason to exempt the original sale.

In its simplest form, a tax-only credit is a credit that is generated in a tax calculation system that is solely related to a previous “tax” that was imposed on a sale, and has no positive or negative effect on the gross sales amount reported. Consequently, when a tax-only credit is generated, whether during the same reporting period that the original tax was reported, or a subsequent reporting period, the tax liability for the applicable reporting period is reduced by the tax-only credit generated. Additionally, the corresponding taxable amount is reduced and a corresponding non-taxable or exempt amount is increased to reflect the tax-only credit generated.

A common practice of refunding sales tax charged or removing the tax from the accounts receivable customer account is to credit the original transaction and create a “re-bill” document that is free of sales tax. Operationally, this is a very labor intensive process and must be coordinated with the creation of a tax exemption that applies the correct calculation of tax, which is why many companies use a journal entry to make the adjustment for sales tax. This method of adjusting tax liabilities can often result in the sales tax burden becoming a cost to the seller rather than a pass through tax.

Therefore, the most efficient and cost effective way of dealing with a refund of sales tax for a customer is to create a “tax-only credit” document within the financial billing system (e.g., SAP) and process the sales tax adjustment that invokes a uniquely designed calculation within Sales Tax Office.

Defining a Tax-Only Credit

3

There are two methods of generating a tax-only credit adjustment in Sales Tax Office; one is through a Web Service API call and the other through a manual process in the Sales Tax Office Calculation Module. The generated tax-only credit adjustment is recorded in the Tax Liability Summary Report for review and for subsequent reporting purposes. Relative to generating a tax-only credit through the manual process available in Sales Tax Office, there are couple important things to remember relating to the process. One, Full Access authorization to the Manual Transaction functionality available in the Calculation Module is required, and two, the Full Access as configured in the Administrative Module must be applicable to at least one division. Another important piece of information about generating tax only adjustments is that a tax only adjustments (whether a credit or debit) are not tied to any particular transaction in Sales Tax Office. There is however a Customer ID field to identify the applicable customer, as well as another available field called Adjustment

Description that can be used to reference the original invoice number as well as to describe the purpose of the tax adjustment or any other relevant information deemed necessary for purposes of creating a sufficient audit trail. The Web Service API call methodology for purposes of generating the needed tax-only credit adjustment is

usually the preferred approach, because this process will record the adjustment in STO as well as SAP, creating a reconciled balance between the tax calculation and reporting system (e.g., STO) and the tax liability book of record (e.g., SAP).

The screen print below displays how the tax only credit information will appear in STO.

Using Sales Tax Office for Generating Tax-Only Credit Adjustments

Based on the general theory of sales tax, tangible personal property is presumed to be taxable unless there is statutory support to exempt the tangible personal property, or, if a valid exemption certificate has been submitted by the customer. Consequently, following the “letter of the law,” if there is no supportable reason to exempt a given transaction, the tax should be generated. But what often happens during the transactional billing and payment cycle is that after an invoice is generated including the applicable tax, a customer then produces a valid reason why the tax shouldn’t have been imposed, or more accurately, why the tax that was properly imposed at the time of processing the transaction should now be credited or reversed. When a customer does not pay sales tax charged by the seller,

the burden of correcting the short-paid invoices falls upon the seller. The tax adjustment must reduce the receivable amount associated with the customer account as well as reduce the sales tax liability account; otherwise, the uncollected sales tax will become a cost to the company selling the taxable good/service.

Most state and local tax authorities in the US require exemption certificate documents be provided by customers making claim for exemptions. However, the timing differences associated with receiving these documents and exemption configuration and setup created in SAP and STO can result in sales tax collections that are later refunded to customers, which is generally subsequent to the original transaction.

The primary scenario that creates the need to generate a tax-only credit is the receipt of a valid exemption certificate (either a hard copy or in electronic form where applicable) after the tax was generated and the invoice was sent to the customer. A secondary scenario that occasionally takes place is that after the tax is generated and the invoice is sent out, the customer takes the position that the item(s) being taxed is statutorily exempt, either through their own interpretation of the applicable state and local law, or as supported by a private letter ruling, legal opinion or relevant case law. The seller may or may not agree with the customer’s position, but if the invoice is short paid, the seller will likewise need to make the needed adjustment, eat the tax, or perhaps take whatever action (business and/or legal) they deem necessary to obtain the receipt of the calculated tax.

Specific Scenarios of Tax-Only Credits

866-513-CORP (866-513-2677)SalesTax.com

© 2011 CCH. All Rights Reserved.3/11 ACS90092889 2010-0575-5

The integrated CCH Productivity Tool provides a solution that facilitates comprehensive end-to-end processing of Tax-Only Credits & Debits in SAP. The modified SAP tax interface and easy SAP input screens for processing tax adjustments, enabling direct link and reference to previous posted SAP invoices and extracts pertinent information and submits the data to Sales Tax Office for processing. The referenced SAP billing document accepts a tax only amount, which allows the user to process adjustments:

� For specific customers, documents or load via file,

� As full or partial tax credit adjustments,

� For specific levels of tax (e.g., state, county, city, etc.),

� For A/R Tax Credits & Debits.

Tax adjustment postings can be performed by SAP users who have access to SAP and do not need special authorization to generate documents from within the SAP FI module. The CCH Productivity Tool delivered via a user exit will perform tax adjustment postings so that they can be reviewed by the accounting and/or tax department as long as they can access SAP and STO.

The Tax-Only Credit document is generated in SAP as shown below. It applies a tax adjustment calculation in the tax amount that reduces the tax expense as well as the tax liability amounts recorded in the sales tax payable accounts, by tax jurisdiction level.

When the calculation is completed it properly posts adjustment to sales tax general ledger accounts and automatically creates SAP FI document and updates the STO transaction history logs.

Processing and Recording Tax-Only Credit Adjustment in Sales Tax Office (STO) Through the Available Web Services into SAP

ConclusionThe use of the Tax-only Credit and Debit Productivity Tool eases and streamlines the process of adjusting for these common but time consuming sales tax adjustments. The seller is able to remain within the SAP interface while still ensuring recoverability of the sales tax and an audit trail of the activity.