4 Things Your Tax Determination Engine Should Do

Tax determination engines are misunderstood, particularly in excise tax applications.

We often hear tax calculation solutions described as “rate assistance” or “accurate invoice calculations”.

There’s more to tax determination engines than you might think. A robust system combined with innovative tax management strategies can transform your business’s approach to tax.

The Core Functionality of a Tax Determination Engine

At its core, a tax determination engine is a powerful calculator. A bare-bones homegrown excise tax determination system works like this:

1. Bring in transaction
2. Identify the type of product being taxed
3. Determine the volume of product
4. Identify the jurisdiction tax rate
5. Calculate excise tax

However, have you ever considered whether there is more to this engine than just calculation accuracy?

Does Your Current Tax Determination Software Answer These Questions?

1. Are you maximizing your tax allowance? Are you entitled to a shrinkage, TARE, collection, or administrative discount?
2. Can you remove the tax on the transaction because of both parties licenses?
3. Is the transaction subject to additional fees?
4. Does sales tax apply?

If you answered “no” to any of these, you could miss out on the strategic side of excise tax strategy.

Benefits of A Tax Determination Engine

An advanced tax determination engine leverages the strength of data and legal expertise, employing intricate algorithms for each transaction. This approach ensures that excise tax transcends its traditional role as a mere pass-through entity, becoming an integral, strategic business component. Below are some remarkable (potentially surprising) features of tax engine software.

1. Identifies What Allowances You’re Entitled To

What do you know about your fuel allowances? Are you collecting everything you are entitled to?  Is your team passing on too much or not enough?

One of the standout capabilities of a sophisticated tax determination engine is its ability to identify specific allowances to which a business is entitled, like collection allowance, shrinkage allowance, TARE allowance, or administrative discounts. The tax determination engine meticulously evaluates each transaction, line by line, using its decision tree logic to ensure businesses can maximize their tax strategy and bottom line.

The savings gleaned from allowances and discounts could cover the costs of a tax determination engine, turning a necessary expense into an investment with immediate returns.

2. Applies Exemptions and Deferrals

Navigating the complex world of tax exemptions and deferrals is no small feat. A tax determination engine simplifies this process by recognizing when transactions qualify for exemptions or when deferrals are applicable with its decision tree logic. It considers the array of conditions and criteria that must be met, drastically reducing the risk of human error and the time spent on manual review.

3. Keeps Up with Rate Changes

Tax rates and regulations constantly change, and staying on top of these changes can be overwhelming. On top of this, if the tax determination software isn’t flexible or easy to update, IT has to get involved in hard-coding changes, which is a heavy lift for IT to maintain and can take time (sometimes you don’t have) to complete.

A third-party excise tax engine software should be backed by an experienced motor fuel tax team that monitors local, regional, and federal tax rate changes and integrates this information into the tax engine, automatically adjusting its logic. This dynamic approach guarantees that businesses remain accurate and compliant with current tax laws. By leveraging such an engine, companies can adapt more swiftly to regulatory changes, maintaining operational efficiency and financial integrity without bogging down IT resources.

4. Improves Invoice Management

When you can scrutinize your invoices before they reach Accounts Payable, you’re in a prime position to spot any discrepancies or missing elements—essentially finding the proverbial needle in the haystack. Utilizing a tax determination engine to cross-check your invoices offers a strategic advantage.

It allows you to meticulously compare the transaction to the GL, ensuring accuracy in what you’re being charged and what you’re charging others. This tool for transaction reconciliation guarantees billing accuracy, providing peace of mind that everything is as it should be.

What a Fuel Tax Engine Workflow Could be Doing

The step-by-step below provides a high-level overview of what tax engine software should do for each transaction. Advanced tax determination engines incorporate complex algorithms to automate these steps and can handle many scenarios across multiple jurisdictions, fuel types, and regulatory requirements.

Step 1: Identify Transaction Details

• Location: Determine the location of the fuel sale to understand which jurisdiction’s tax laws apply.
• Fuel Type: Identify the type of fuel being sold as tax rates can vary by fuel type (e.g., diesel, gasoline, biofuel).
• Volume: Record the amount of fuel being sold.

Step 2: Calculate Base Tax Amount

• Calculate: Using the fuel volume and the applicable tax rate, calculate the base tax amount before adjusting for exemptions or discounts.

Step 3: Look for Counterparty Licensure

• Find and Verify: Identify and ensure the counterparty license is valid and the transaction can legally happen.

Step 4: Check for Allowances, Exemptions, and Discounts

• Allowances: Check to see if you can collect a collection, TARE, or shrinkage allowance.
• Exemptions: Check if the transaction qualifies for tax exemptions.
• Discounts: Check to see if any administrative discounts are applicable.

Step 5: Apply Exemptions and Discounts

• Deduct: Apply all exemptions and discounts to the base tax amount to determine the final taxable amount.

Step 6: Retrieve and Apply Sales Tax if Applicable

Step 7: Return to Back Office

Step 8: Document for Reporting

• Document: Maintain an audit trail for the tax calculation details for reporting purposes. This includes storing data on the transaction, the calculated tax, and any exemptions or discounts applied.

Exploring the capabilities of tax engine software reveals a world of strategic possibilities beyond mere tax calculation accuracy for excise tax professionals. From uncovering and applying entitled allowances and exemptions to effortlessly adapting to rate changes and enhancing invoice management, these tax engines offer a comprehensive suite of features that can transform the approach to managing fuel excise taxes.

By leveraging such advanced technology, businesses ensure compliance, optimize their tax strategies, and position themselves for financial efficiency and operational excellence. The benefits of implementing a sophisticated tax determination engine extend far beyond what might initially be expected, proving invaluable in navigating the complexities of excise taxes and uncovering opportunities for substantial savings and improved business processes.

This analysis is intended for informational purposes only and is not tax advice.  For tax advice, consult your tax adviser. See the full disclaimer here.