Navigating the Leasing Tax Waters
Tax issues facing the leasing industry in today's multinational business landscape.
October 29, 2009
The tax horizon is constantly changing. New rules and regulations are passed at record pace and the time in which companies are expected to comply is rapidly getting shorter. Companies are feeling the legislative bite fueled by a struggling economy and governments pressed to shore up missing dollars to cover budget shortfalls.
At the same time, companies are looking to stabilize or increase revenue through expansion into new markets both U. S. domestic and international. In this article, we look at the complexities facing equipment lease and finance organizations in the U.S. market as they work to keep their corporate heads above water while continuing to grow the business.
Current U.S. Tax Complexities
According to the Sales Tax Rate Report distributed annually by Vertex Inc., there were a total of 1,048 sales tax changes in 2008, which included rate increases, rate decreases and new tax rates. A snapshot of 2009 indicates that 797 sales tax changes (January through July 2009) have already been implemented with more expected throughout the coming months.
No tax department can manually handle keeping up-to-date with these changes. The leasing industry faces additional significant tax challenges and audit risk from the sheer volume and nature of leasing agreements. Lessors have more to deal with than ever before with more than 7,000 U.S. taxing jurisdictions and states showing heightened attention toward corporate auditing.
Equipment Type and Usage
A lessor is responsible for calculating and remitting the appropriate tax based on the lease, which includes factors such as the lease type, equipment type, lease term and usage. The taxing of leased equipment is based upon specific transaction information. Equipment features and usage are taken into account to determine not only the rate at which the asset is to be taxed, but also whether or not it is even taxable. For example, companies must analyze each item for specifics like the vehicle’s weight, whether it will be used off-road or on-road, whether it is being towed and if so, does it have a motor in it. Answering questions such as these will help define the rate at which the equipment is taxed in a particular jurisdiction within a specific state. The company will also need to analyze how the equipment is used (e.g.,. a forklift that is leased to move goods around a stockyard is taxable, a forklift that is kept inside a building and used as part of the manufacturing process is not subject to tax). It is the company’s responsibility to maintain their equipment usage records to ensure that they properly record their taxable and nontaxable equipment.
Accurate Exemption Certificate Management
As states need additional sources of revenue, auditors are stepping in to take a closer look at leasing organizations and the way they manage exemption certificates. Companies need to answer several questions regarding their customers that present exemption certificates, which makes them exempt from paying taxes on their leases. The first thing a lessor must verify and maintain is the validity of their exemption certificates. Are they up-to-date? Is the information accurate? Has the customer even provided the exemption certificate for the company’s files? Auditors will assess taxes, interest and penalties based on inaccuracies in a lessor’s exemption certificate management process.
Plotting a Course for Tax Compliance
A large number of leasing organizations manually handle the research and maintenance of tax rates and rules required for tax compliance. However, manual processes do not scale well and are prone to inconsistencies and errors, to say nothing of the use of resources that could be undertaking more value added work.
For most multinational leasing companies, treading water is no longer an option. At a time when tax departments already are strained by corporate expectations to do more with less, it is important that they take a close look at current processes and analyze ways to streamline them. There are solutions on the market that are fully capable of seamlessly integrating with Enterprise Resource Planning (ERP) and in-house financial systems and that can centralize the tax process in a consistent, effective way. These solutions — supported by tax industry research professionals — provide access to real-time tax rates and rules, allowing tax department staff to focus on more strategic tax planning.
In addition, these systems support the detail required by the leasing industry to ensure that data is fully captured on the front end and reported in a highly detailed and flexible manner at the back end. These reporting systems add high value, as they place real power in the hands of the tax department, shorten audit defense periods and provide global oversight of both tax and management information to a central location.
* This article was previously published in World Leasing News.
Doug Cohen is the senior channel manager and a member of the Alliances Group at Vertex Inc. He is a member of the Equipment Leasing and Finance Association (ELFA), ELFA Operations & Technology Planning Committee, Association of Consumer Vehicle Lessors (ACVL) and the Association for Retail Technology Standards (ARTS).