Procurement Cards And Tax Issues p. 44

By: MARK FITZGERALD AS MORE NEWSPAPERS adopt procurement cards, their naturally cautious purchasing managers are raising a new concern: Will these cards expose papers to a host of unforeseen tax liabilities?
It's a question many industries are facing as procurement cards become more popular, says Colleen P. Lindow, director of product development and marketing for Visa Purchasing and Corporate Cards.
"Businesses are asking, will purchasing cards complicate paying sales tax and use tax and make it a nightmare?" Lindow said at the 39th annual conference of the Newspaper Purchasing Management Association, which met recently in Houston.
Procurement, or purchasing, cards are similar to personal or corporate credit cards except that they are not used for travel or entertainment ? and they permit businesses to place extensive controls on how and where they can be used. Visa and American Express are two issuers who are aggressively marketing the cards.
In the past two years, newspapers have been a strong growth area for procurement cards as more purchasing managers have been sold on the advantage of being able to make small purchases without the added expense of creating, tracking and accounting for a purchasing order.
For instance, the Knoxville (Tenn.) News-Sentinel adopted procurement cards after a study of its purchasing orders revealed that fully 92% of all checks written were for amounts under $1,000. All those checks combined, however, amounted to just 23% of total dollars spent, the newspaper calculated.
But procurement cards have a disadvantage, too, when it comes to calculating sales or use taxes. Only a very small percentage of businesses that accept procurement cards ? about 5%, issuers say ? provide receipts or bills with so-called "Level II" information about the sales tax paid or the use tax owed.
Use tax is the tax owed by residents or businesses of a state with sales tax on purchases made out of state. Calculating use tax can be a complicated matter, given the varying rates of tax on different purchases as well as the numerous exemptions under federal and state tax laws.
"With requisitions and purchasing orders, it was simple [to track use tax] because we created a big paper trail and we looked at every single purchase," Douglas P. McCubbin, a senior manager at the accounting firm KPM Peat Marwick LLP, told the NPMA.
Businesses could, of course, create a purchase order for every mail order purchase, but McCubbin noted that would defeat the very purpose of procurement cards.
"If your tax department is doing a line item review of every purchase, yeah, that's accurate. But that's not reengineering ? that's just doing the same thing all over again. And it's not practical," he said.
Similarly, many businesses with new procurement cards simply bar use of the card for mail orders.
Instead of doing that, however, McCubbin urged the newspaper purchasing managers to follow the examples of companies Visa and KPM Peat Marwick recently identified as "best practices" procurement cards users.
These businesses developed estimating tools that studied in detail the history of purchases, identified accurate samples and extrapolated the amount of sales or use tax owed from those samples, McCubbin said.
Newspapers are at a good point to develop those models now, McCubbin suggested. About half the attending NPMA members indicated their newspapers have the cards, and most have had them for about two years ? the time necessary, McCubbin said, to develop a historical model.
Newspaper purchasing managers should involve their tax departments in developing these models ? and understand how vital the estimating will be at audit time.
"What's very, very important to this . . . is to say, let's think ahead three years from now, when an audit comes in. What am I going to have for him to sample?" McCubbin said.
"That auditor will want to go beyond the details," he continued. "You should have the sampling methodology ready for his examination. The worst thing to do is when a state auditor comes in and asks how do you handle purchasing cards [is for you] to say, 'Well, I don't know, we do this and that.' So the auditor says, 'Fine, show me 10,000 transaction documents,' " McCubbin said.
Editor & Publisher n June 15, 1996