Eliminating wasteful spending is an ongoing focus for card program directors and managers. While it is important to keep your eyes peeled for larger, unnecessary purchases, some smaller forms of spending, like sales tax, can still add up and cost the organization more money that could best be spent elsewhere.
If your organization is tax exempt, then cardholders should not be paying sales tax on purchases. What may seem like a small oversight could amount to thousands, or more, in wasteful spending each year. Adjusting your internal spend controls to better recognize and track sales tax is a logical solution that is not hard to achieve.
What Is Tax Exempt Status?
Tax exempt status means that an organization is exempt from federal taxes under the Internal Revenue Code as defined in Section 501(c)(3). Higher education, government agencies, and nonprofits are often tax-exempt when it comes to their income taxes as well as paying sales tax. This is intended to maximize the good the organization is doing while minimizing costs and financial obstacles.
Not just any organization can be tax exempt. The company or institution needs to provide demonstrable benefits to its community, students, or other individuals and industries that are in need. If an organization is tax exempt, it means they are heavily monitored and must report on their mission, revenues, expenditures, and more on a regular basis.
That said, cardholders should be able to provide the unique tax exemption number when making a purchase with a vendor or retailer on their purchasing card to fully utilize these benefits.
What Happens When Employees Pay Taxes Despite Tax Exemptions?
So, what happens when someone makes a purchase on their P-Card and does not utilize the organization’s tax-exempt status? This is clearly considered wasteful spending both in terms of taxpayer money and for the organization as a whole.
In some cases, employees may forget or just not want to deal with the hassle of having to provide the tax-exempt number to a cashier if they are in a hurry. Other times, it is the card manager’s responsibility to make sure new employees are made aware of the tax-exempt status and how to utilize it for purchases. Either way, you do not want to make it so easy for employees to divert money, knowingly or unknowingly, from the organization.
Sales taxes can add up quickly especially when it comes to larger purchases like laptops for one department or new office equipment.
Some card managers opt to put a threshold on how much sales tax an employee may pay. For example, anything over $10 may create a red flag and require correcting. This itself can be a hassle when the employee could have easily used the tax-exempt status in the first place.
Tips on Cleaning Up Wasteful Sales Tax Purchases
The good news is that sales tax charges do not have to sneak by in your expense reports forever. There are a few actionable solutions that can help employees reign in on their misuse (or nonuse) of the organization’s tax-exempt status.
1. Make It Easy by Providing the Tax-Exempt Number
Some people opt to make it easier for cardholders by placing the specific tax-exempt number right on their P-Card. That way, they can quickly reference it when making a purchase instead of having to sort through their wallet or belongings in search of the number. This only creates frustration and can deter employees from following through with using the number.
2. Directly Address Employees and Provide Correction
Again, not utilizing tax-exempt status when making a purchase may be an oversight among some employees or they may not view it as a major concern. It is crucial to communicate the importance of the tax-exempt status and why employees should not waste money unnecessarily.
When it is revealed that someone has been paying sales taxes on their purchases, consider addressing the employee directly and providing them with correct steps to follow in the future. You may even want to go as far as requesting that the employee get the sales tax refunded on each applicable purchase they made for that billing cycle.
3. Utilize Data and Automation to Reduce Wasteful Spending
Data and automation are true assets for procurement professionals given today’s instant payments climate. Luckily, there are expense monitoring solutions that will work with you and the unique needs of your organization to pinpoint wasteful spending in this area. The easiest place to start is by looking at the bank data that gets automatically reported with each billing cycle.
“Card managers and expense auditors can use tools to help look at bank data to determine if sales tax is present. Leveraging data is also essential to further track trends among cardholders who are commonly not using tax exempt status as well as vendors that may be reporting it incorrectly.”
Doug Hindsley, Senior Partner, Card Integrity
The Importance of Effectively Tracking Sales Tax
If you are trying to grow your card program or already have hundreds of cards to manage, it can be nearly impossible to track every instance where sales tax has been paid despite a tax-exempt status. What is worse is not being able to track sales tax over a lengthy amount of time and allowing the wasteful spending to grow.
One instance that commonly requires stronger expense monitoring controls is Amazon Business. There are many benefits to using Amazon Business for your organization. However, it is also easy for employees to take advantage of your tax-exempt status by using the account to make personal purchases. Since your tax-exempt code is already built into the account, Amazon Business purchases require careful monitoring to ensure an employee is not trying to benefit from free taxes and zero shipping fees.
So, as you can see, it is a matter of making sure employees are utilizing the tax-exempt benefits but also not abusing them, especially when making online purchases.
Solving Wasteful Spending by Carefully Tracking Sales Tax Data
Card Integrity makes it easy to effectively track sales tax spend and improve overall spend visibility among departments. Card Integrity’s flagship service, DataWISE operates as an expense monitoring tool that adapts to meet the specific needs of your organization and card policy.
DataWISE partners with card managers to assist them with the crucial spend data they need whether this involves:
- Setting up alerts to help you address whether sales tax is wrongfully present
- Rounding up unnecessary sales tax that has been paid by specific departments or cardholders for a bird’s eye view of the situation
- Tracking that reports patterns by person or by store (so you can see if trends are present to further prevent nonuse of your tax-exempt status)
- Operating an initial review of receipts to validate whether sales tax was charged on the receipt
If you are ready to let Card Integrity offer a helping hand when tracking down wasteful spending such as unnecessary sales tax for your tax-exempt organization, feel free to learn more by booking a free, no-obligation demo.
Additionally, we created a step-by-step blueprint to expense data monitoring to help boost compliance, deter fraud, and communicate spend data insights. It can help you get your expense monitoring program off the ground if it doesn’t really exist yet, or fortify it if it needs some help. Download it for free below!
