Let’s say a corporate tax regime was so complex, circuitous, and onerous that every transaction had more than 200,000 possible outcomes. Welcome to the world of transactional tax determination in the oil & gas sector.
The stakes, of course, are high — as they are with any aspect of corporate tax compliance. Get a single step wrong in the process and you violate regulations, pay the wrong amount of tax, lose the trust of customers from whom you collected taxes, and incur the cost of cleaning up the mess (including audit-related interest and penalties.) Errors and inefficiency are more likely when oil & gas companies manage tax compliance with manual processes and siloed, stand-alone, homegrown systems that are costly and time-consuming to maintain.
On the positive side, the fuel tax determination workstream is a perfect problem for computer code — a series of if/then statements with thousands of possible permutations that are no sweat for an algorithm backed with logic that reflects the latest rules and rates.
To illustrate the point, here is a simplified view of some of the questions that must be addressed to accurately calculate and remit sales, use, and excise taxes for a commodity as ubiquitous and fundamental to the economy as gasoline:
- Product — The Federation of Tax Administrators recognizes at least 46 gasoline commodities, so the first tax compliance question is “What do we mean when we say gasoline? (The process is the same for other basic fuels such as diesel, jet fuel, compressed natural gas, and liquified petroleum.)
- Above or Below the Rack — Is the gas in a pipeline or a railcar? Tax implications differ depending on whether a petroleum product is being sold wholesale from the terminal system — that is, “above” the loading racks where tanker trucks fill up — or after the fuel has been removed from the terminal system.
- Point of Title Transfer — The delivery point (Point of Title Transfer) affects taxability because it impacts which jurisdictions, taxing authorities, and tax type are activated for each transaction.
- States — Is it an interstate or intrastate transaction? Which states’ tax regulations are triggered?
- Taxing Authorities — Which municipal, county, state, and federal taxing authorities touch the transaction and which taxes are activated at each level? What are the rates? It’s critical for fuel suppliers and distributors to hold the right licenses from the relevant states to minimize their tax liability.
- Licenses — There are more than 1,100 types of licenses in the U.S. that determine when tax exemptions apply.
Calculate all the possible combinations of these variables and you have more than 200,000 combinations — for every transaction! After that, tax reporting and filing is another process that benefits from the efficiency and accuracy delivered by automated solutions.
On the positive side, oil & gas companies are increasing their investment in digital technologies to improve operational efficiency. A 2015 study from Accenture and Microsoft found more than 60% of oil & gas companies intended to increase spending on digital technologies within the next three to five years. That’s now. It’s important for corporate finance and tax leadership to be part of those budget allocation discussions in order to better advocate for the benefits of tax technology that is backed by comprehensive, up-to-date content and integrated with the company’s enterprise resource planning (ERP) system.
In fact, the need to migrate to SAP’s cloud-based S/4 HANA ERP is prompting many corporate IT departments to review and overhaul their financial and back office systems, including their current oil & gas tax systems.
To address oil & gas companies’ primary tax management challenges, such a system should:
- Take into account all the variables: movement or sale of the product, mode of transportation, title transfer locations, overlapping tax jurisdictions, product-based tax rules, the type of transaction and its origin and destination, buyer/seller licensure, and exemptions and exceptions.
- Maintain up-to-date rates, rules, taxability, jurisdictional tax scheme changes, and regulatory and legislative changes. Unlike other industries, the oil & gas sector must contend with monthly tax rate adjustments in several states that tie rates to gas prices.
- Identify, calculate, collect, and submit the appropriate taxes for every transaction.
- Collect, maintain, and report transaction details as necessary to compile the required reports and returns.
Corporate finance and tax departments spend a lot of time and resources grappling with these tasks. Automation improves efficiency, reduces errors, and frees up professional managers to deliver greater strategic value.