Is Now the Right Time for a Managed Compliance Agreement?
Is this purchase taxable? Does that purchase qualify for exemption? Determining tax due on all purchases on a transaction-by-transaction basis has become an Achilles Heel for many manufacturers when resources are tight. Companies are looking to improve efficiency and do “more with less.” Given the diminished resources, it may be time to consider engaging in a Managed Compliance Agreement (“MCA”).
What is a MCA?
A Managed Compliance Agreement, or Effective Use Tax Rate Agreement, is a contract between a taxing jurisdiction and an eligible taxpayer that provides an agreed-upon formula (“Effective Use Tax Rate”) for calculating and remitting use tax on the company’s purchases, rather than being determined on a transaction-by-transaction basis.
Benefits to the Taxpayer
The MCA offers several benefits to manufacturers including freeing up staff time and reducing taxability decision errors:
- Saves Staff Time: The Accounts Payable or Purchasing personnel are not spending time reviewing taxability for each transaction.
- Minimize Errors: Taxability decisions for these purchases do not fall on the shoulders of busy employees who may not have the training or knowledge to make accurate decisions.
- Reduce Audit Costs: Having a pre-arranged tax rate for high-volume purchases reduces the number of transactions reviewed by the auditor, resulting in less work for the staff.
- Minimize Audit Assessments: A consistent tax rate that minimizes errors reduces the risk of large audit assessments.
How is an Effective Tax Rate Calculated?
- Preparation: Entering into a Managed Compliance Agreement with a taxing jurisdiction requires detailed planning. Suitable accounts must be selected and appropriate sampling methods need to be utilized prior to presenting a proposal to the Taxing Authority.
- Negotiations: Several details need to be discussed with the Taxing Authority, including proposed sample size and method. Settling on an Effective Use Tax Rate requires a review of taxability and development of calculation methodology which is presented to the Taxing Authority. In some states, a formal agreement is settled where no assessments will be made and no refunds will be requested. In other states, an agreement is not formalized.
- Adaptation: Once the MCA is finalized, key staff need to be trained to comply with the agreement. While a significant number of transactions will fall into the effective tax rate calculation; not every purchase will fit. Fixed Assets and utilities typically fall outside the calculation and will still need to be analyzed on a transaction by transaction basis.
A Managed Compliance Agreement can simplify and safeguard a manufacturer’s sales and use tax process if the circumstances are right, the agreement is negotiated correctly, and the staff is trained to follow the new procedures. Cherry Bekaert’s sales and use tax team is ready to answer questions and guide your company through the MCA process. For more information, visit our website or email us as at SalesTax@cbh.com.
