Tips and Insights into Data Mining for Property Tax Purposes

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1 Tips and Insights into Data Mining for Property Tax Purposes Alan Sandusky Director of Professional Services PowerPlan Inc. Atlanta, GA For asset-intensive companies, the process of identifying non-taxable costs can be arduous. Traditional enterprise asset management (EAM) and enterprise resource planning (ERP) systems often do not capture the level of detail needed for maximizing property tax strategy. The necessary information is either not available or requires time-intensive manual processes that are challenging and costly, both for internal and third-party preparers. The business implications of using inaccurate or under-detailed asset information can be significant. The most eye-popping being the risk of over-paying millions of dollars in property taxes annually. Corporate property tax departments must have the systems in place to process renditions and pay tax bills on time. They must also ensure that all necessary data is available and accessible in order to minimize the company s property tax liability to that which it is legally required to pay and not a penny more. A company s accounting policy and practices directly affect the quantity and quality of the data it collects for property tax reporting, and can significantly impact the amount of tax that is actually paid. It is vital that property tax professionals understand the data requirements for accurate reporting and payment of taxes. They must also clearly communicate any gaps or problems to a multi-disciplinary team that can correct these deficiencies. In particular, a company must be aware of and take action to correct inaccurate or incomplete information regarding ghost assets, asset retirements, depreciation, construction work in progress, cost of removal and a number of asset life analysis topics, such as obsolescence. 38 th Annual Conference Institute for Professionals in Taxation

2 This paper explains the best practices for capturing asset and cost details that can lead to improved reporting, more informed decision making and the accurate calculation and payment of property taxes. Property Tax Compliance: What You Need and Where to Find It All companies have at least a rudimentary level of information on their assets that may be used to help determine property tax liability. This basic set of data elements should include information on the asset s company (or subsidiary), its original cost, the state (or country) in which it is located, the type of property (real vs. personal), class of property, its specific location and its vintage (when it was built or purchased). While this information is valuable, it is unlikely to satisfy the myriad of calculations necessary to accurately and efficiently determine property tax liability. This is particularly true for asset-intensive companies doing business in several states or countries. Often companies have a combination of ERP and legacy systems, along with manually created spreadsheets, that they use to make the necessary calculations for tax and depreciation reporting. A major challenge these companies face is that even the industry s best ERP and EAM systems are not designed to fully address the specialized needs of property tax accountants. The lack of a purpose-built application for asset tax accounting has obliged asset-centric organizations to resort to building thousands of spreadsheets, keeping multiple sets of books, using manual processes and customizing their systems to try and fill in information gaps. This places undue pressure on the accounting teams that are obliged to make multiple, and often redundant, entries. This process is both labor-intensive and highly prone to error. Further, these stop-gap solutions may work for a time, but are often undermined when mergers, acquisitions or divestitures occur. Makeshift tax accounting processes can cost companies millions of dollars in staff hours and consultant expenses, as well as in property tax overpayments. Equally problematic, a flawed process can introduce serious audit deficiencies and reporting risks. These problems demand new approaches to asset data management that ensure the necessary information is automatically captured, stored and accessible to everyone that touches the asset accounting and tax calculation process. A key strategy in this new approach is to mine all available data for property tax gold. That is, identify non-taxable costs and other information that draws a true valuation of the company s assets in Page 2

3 calculating property tax. The more accurate, comprehensive and accessible the data, the less likely the company will overpay property taxes. A smart place to begin is within the Asset Management module of the company s ERP system. A majority of the information needed to accurately classify and evaluate taxable (and nontaxable) assets can be found there. Several categories of asset detail are important for property tax accounting purposes, but the following are often excluded from or incorrect in ERP databases: Asset Type Depending on the industry and jurisdiction, categorizing certain assets by type may determine its true taxability. Location Many companies have little or no information about the exact location of certain assets, especially older assets that may have been inherited from legacy systems or acquired during mergers. As a result, assets may stay on the books long after their useful life or even after removal. Book-to-tax differences After an acquisition or public offering, the value of a company s existing assets may change. For example, if a company was purchased for a 20 percent premium, its assets must be reported from two perspectives the original cost and the acquired cost. The former which is usually smaller should be the cost used to determine property tax liability, and that level of detail must be available for audit and compliance purposes. Additional data is usually needed to accurately assess and evaluate each asset. Another source to investigate is the EAM system. EAM s however, are often where the biggest data inaccuracies can arise. This is because many accounting systems require field workers to enter work order data, for every step in the process and across numerous fields. In some cases, EAM users are forced to configure their work orders to meet complex accounting needs. A single job may require multiple child work orders to map a project to individual accounting work breakdown structures for installs, removals and miscellaneous expenses. Putting accounting tools into the hands of non-accountants is not only unfair to the workers, adding unnecessary complexity to their jobs; it virtually ensures that the data entry will be incomplete or wrong. Page 3

4 Valuable information may go missing because it fails to map from the Work Management to the Asset Management system. This missing data can dramatically impact asset valuation for property tax purposes in the following ways: Removal Costs a utility company is installing a new power line, requiring a dozen new utility poles. A number of expenses should be factored into the book value of the new poles such as the cost of removing the old poles. Including these costs means the newly installed poles are valued too high, resulting in higher property taxes paid throughout their life cycle. Retirements A physical asset may be replaced, but not removed from the books due to sloppy accounting practices. Even though the asset may have been fully depreciated and have a zero carrying cost, taxes continue to be paid on the original cost or a depreciated cost. Older assets (that may have zero net book value) will be taxable at the depreciation floor level. Ultimately, a company could have one functioning asset but be paying property taxes on two. The under-reporting of asset retirements can lead to higher local assessments, on asset balances that are no longer in service, and unreasonable allocations of central assessments. Many property tax problems stem from inaccurate bookkeeping related to the construction of assets a frequent occurrence for asset-centric companies that may build and install hundreds or thousands of new assets annually. Often the error occurs in the capitalization phase, which from an accounting perspective is the process of moving a project under construction to a completed, installed and working asset. The construction life cycle accounting process can differ based on the type of asset being built. Installing cable equipment may require a different treatment than constructing an oil and gas pipeline. Mapping all components of the just-constructed asset from the Work Management to Asset Management system is an extremely critical step. By maximizing deductions during the construction cycle and integrating that data into ERP and EAM databases, the company will have a better grasp on valuation of the asset going forward which will result in more accurate property tax calculations. Remedying Property Tax Problems The most important step in remedying accounting deficiencies that lead to property tax reporting problems is realizing that a problem exists. Unfortunately, fixing the problem can be another painful endeavor. Page 4

5 Some companies simply throw more bodies and spreadsheets at the problem. While this may provide short-term benefits, it does not remedy the long-term problem of ongoing inaccuracies that lead to over-reporting property taxes. Further, the approach does not sufficiently insulate the company from the inevitable turnover of staff. Similarly, some companies will hire consultants to research the situation, often through market value analyses of tangible assets. The consultants may also be tasked with conducting a unit value study or embedded cost study, each of which is designed to identify and repair past property tax deficiencies. All of these solutions are costly, time-consuming and not necessarily guaranteed to fix a systemic deficiency in a company s property tax accounting methodology or process. The only sustainable answer is to tackle the problem with an enterprise-wide, software-based solution that eliminates manual bookkeeping and automates as many practices as possible. This is truly where data mining comes into play, as the company can have access to all of the data necessary to handle this critical function. The software-based solution should integrate with all existing ERP and EAM systems and provide the computations, entries and support needed to calculate property and other taxes. Ideally, the solution will eliminate the need for error-prone manual accounting and in-field operations support to determine monthly tax liability across multiple companies, consolidated business segments and tax jurisdictions. Also, because accounting and tax rules are constantly evolving, companies need the system to stay up-to-date with all current and future rules (FASB, IASB, State and IRS) at the level of detail and volume of asset records required to address changing accounting climate and ongoing corporate initiatives. Even with a purpose-built system in place, the property tax team cannot tackle the problem alone. It must create and manage a cross-functional, inter-disciplinary team of subject matter experts who can take a methodical approach to the project. Project approval should not be a problem, given the significant bottom line impact of inefficiencies in property tax payment. In addition to the property tax leader, a critical member of the project team is an IT champion who oversees the compilation of necessary business information assets. This may require the use of a business analyst or IT project manager who can tap into the requisite data. Page 5

6 The team should also include accountants from Asset Management with expertise in creating and capitalizing assets, as well as representatives from Work Management who will bring knowledge of operations nuances to the table. The team should be tasked with correcting property tax-centric problems and with examining corporate policies and practices that may impact the accurate valuation of assets. The result of leveraging a purpose-built software solution with a cross-functional team of accounting, tax and IT experts can be more aggressive tax positions without manually trolling through order detail, making the process of evaluating and calculating new tax matters significantly more efficient and auditable. The tax organization will have stronger controls, including automatic maintenance and reconciliation from the General Ledger to the tax return. If asset capitalization/componentization and other tax functions are automated, the company can create new assets, retire old assets off the books, and allocate labor and contractor invoices to cost of removal by combining financial information within its existing ERP and EAM systems. Further, it can align detailed cost information with physical assets across multiple geographies to more efficiently capture tax benefits. Asset-centric companies own and manage billions of dollars in assets, and pay annual property taxes in the millions. Correcting past mistakes and streamlining the property tax accounting function is an economic necessity. The resultant tax savings will generate more cash, mitigate compliance risk and help support a culture of prudent cost management. Alan Sandusky is a Director of Professional Services at PowerPlan Inc., an enterprise software company devoted to helping asset-centric businesses optimize their financial performance. Alan brings nearly 20 years of experience in design, implementation and business process improvement to PowerPlan, where he has specialized in PowerPlan Property Tax implementations since Alan has a broad range of experience with energy and other asset-intensive companies, focusing on financial management and customer systems. Prior to joining PowerPlan, Alan consulted with large companies to implement business process improvement and technology for financial and customer applications, which includes several engagements in the energy industry. Alan graduated from The University of Maryland, where he received a Bachelor of Science degree in aerospace engineering. Page 6