Moderated by Srishti, Financial Technology Advisor at Hyperbots
Kate: Hello, everyone! My name is Kate, and I’m a financial technology advisor here at Hyperbots. Today, I’m delighted to have Shaun Walker as my guest. Hey, Shaun, how are you doing today?
Shaun Walker: I’m doing great. Thanks for having me.
Kate: Thanks for joining us. So, Shaun is the SOX Compliance Manager at Norfolk Southern. Today, we will be discussing defining the chart of accounts for sales and use taxes. So let’s dive right in. How should companies approach defining the chart of accounts for sales and use taxes? Is there a one-size-fits-all solution?
Shaun Walker: Companies should tailor their chart of accounts based on their operational complexities and tax compliance needs. For example, companies operating across multiple states may benefit from a statewide approach, whereas those in just a single jurisdiction might only need a single sales and use tax payable account. A one-size-fits-all approach doesn’t apply. Businesses vary in scope, tax obligations, and reporting requirements.
Kate: Moving on, what are the pros and cons of using a single sales tax payable account for all sales taxes under accounts payable liabilities?
Shaun Walker: The main advantage of using a single sales tax payable account is simplicity—it reduces the complexity in the chart of accounts. However, the downside is that it’s not as granular, which can make tax reporting and reconciliation more difficult, especially for businesses operating in multiple states.
Kate: Understood. So how can a statewide approach in the COA help companies that operate in multiple jurisdictions?
Shaun Walker: A statewide approach enables companies to allocate sales taxes owed by each state, which is essential for accurate state tax reporting and compliance. For example, if a company sells goods in California, Texas, and Florida, creating separate accounts for each state’s sales tax helps keep records organized and ensures each jurisdiction’s tax obligations are met without confusion. This approach also simplifies audits and compliance checks, as transactions are already broken down by state.
Kate: That does make a lot of sense. So, Shaun, what about further breaking down sales taxes into county or municipal levels? Is this necessary or is it overcomplicating the chart of accounts?
Shaun Walker: For companies with substantial operations across different counties or municipalities within a state, further breakdowns may be necessary. For example, a business with outlets in various California counties may benefit from categorizing sales taxes by county since California has county-specific sales tax rates. However, for companies with limited geographic reach, such granular segmentation could overcomplicate the chart of accounts without adding much value.
Kate: I understand. Moving on to the next question, would it be beneficial for companies to define sales taxes by expense head in the COA, such as categorizing tax for office supplies, equipment, and services separately?
Shaun Walker: Defining sales taxes by expense head can be useful if there’s a significant tax rate difference for different expense types. If a company frequently purchases taxable and non-taxable items in different categories, separating sales taxes by expense head could improve financial insights. However, the added complexity may outweigh the benefits for most companies, especially those with relatively uniform tax treatments across purchases.
Kate: That is a very interesting point. So, Shaun, what are some implications if the chart of accounts for sales and use taxes is not defined properly?
Shaun Walker: Improperly structured tax accounts can lead to compliance issues, inaccurate reporting, and challenges during audits. For instance, if a company doesn’t separate taxes by state, they may inadvertently under-report or over-report taxes in specific jurisdictions.
Kate: Understood. How can AI help companies better manage sales and use tax accounts within the chart of accounts?
Shaun Walker: AI can automate much of the categorization, reconciliation, and compliance review for sales and use taxes. For example, AI systems can analyze invoices and automatically suggest or assign GL codes for each jurisdiction’s tax, which is particularly useful for companies with complex tax obligations. Additionally, AI can help identify discrepancies, suggest updates based on changing tax regulations, and streamline audit processes by accurately categorizing transactions by tax jurisdiction.
Kate: That is a very unique take on this and with that, we have reached almost the end of our discussion today. So the last question is: Can you share an example of how a company might review and adjust its chart of account structure for sales taxes to improve accuracy and compliance?
Shaun Walker: Sure. For instance, a retail company expanding from local to multi-state operations could review its chart of accounts to add state-specific sales tax accounts. Initially, the company might use a single sales tax payable account, but as it expands, separating taxes by state becomes essential. By adding accounts for each new state and using sub-accounts for major counties, they ensure better compliance and easier tax filing. Periodic reviews, possibly assisted by AI, help them keep up with any changes in state and county tax rates, ensuring accurate records.
Kate: That was a really good example, Shaun. I completely agree with you and with that, we have come to the end of today’s discussion on defining the chart of accounts for sales and use taxes. Thank you so much, Shaun, for joining us and sharing your insights, and a big thanks to our listeners as well. I’ll see you around.
Shaun Walker: Alright! Same to you. Thanks.
