Reinventing Operations to Meet 24/7 Customer Needs

Tim Denman: Welcome to today’s “How Wholesalers Can Automate Key Business Functions and Focus on Strategy” webinar, hosted by CGT and presented in collaboration with Vertex. I am Tim Denman, editor in chief of CGT and RIS.

With me today are Mike Lott of Vertex, and Dawn Regan of Vertex Consulting. Thanks for joining us today. Why don't you each introduce yourselves and discuss your roles at the company?

Mike Lott: Sure, thanks for having us join you this afternoon, looking forward to a great conversation. My name is Mike Lott, I am a senior product manager at Vertex and I've been with the company a little over 12 years now. As a product manager I work with our customers, our prospects, as well as other SMEs within the marketplace to understand what the pain points are that customers are going through right now, and help bring those pain points back to develop solutions that can help address those issues and allow our customers to be more successful with our products.

Dawn Regan: Hi, I'm Dawn Regan and l am with Vertex Consulting. I serve as the SAP practice lead, so my team and I help implement the Vertex products within SAP ERP systems. We do a lot of the discovery — find out what the pain points are and then help to create good, successful implementations that can streamline the business.

Denman: Thanks, Dawn and Mike. Today we're going to cover a lot in a short time. In just a moment, we're going to look at the ongoing retail and CG evolution, the opportunities to reimagine operations, and then how to make tax functions more efficient, the dangers of managing the exemption certifications manually, and we will end with a discussion of some field examples.

The retail and CG industries have been forced to evolve at an unprecedented rate over the past two years. The good news is that both retailers and CGs are used to constant change, but the bad news is the rate of change has greatly accelerated. While operations had to pivot quickly to address change in consumer demand and behavior, this pivot, although necessary, was also an opportunity to reimagine and enhance the enterprise. On the retailer's side, decreased foot traffic has allowed some of them to transition the stories, at least in part, to showroom-only buildings, while the majority of inventory is held off site in distribution centers.

While this model works for the classic furniture, electronics, sporting goods examples, the showroom model doesn't work for everyone. What we have seen across the board are good reliance on DCs for inventory storage and direct-to-consumer fulfillment needs. In conjunction with the movement of inventory out of the store, the transition to smaller format stores has been seen. This is a trend we observed before the onset of the pandemic, and it is only increasing.

Another big change we've seen is the increased use of stores as fulfillment centers. Dark stores are on the rise, as well as traditional stores taking on bigger fulfillment roles. The spike in buy-online, pick-up in-store, including curbside pickup, has sparked an increase in in-store technology investment, as well as the reimagining of the associate's role at the store level.

In addition, and we're going to dive deeper into this in a bit, there's been a growth of online marketplaces, whether it's Amazon, Walmart, eBay, or any number of smaller online marketplaces. There's been a spike in not only online shopping, but the wholesalers that support this model. Today we're going to explore the role wholesalers are playing in this changing landscape, and how adopting software solutions can help free vital staff from mundane tasks, allowing them to focus on growing the business.

The second big point we will cover is that agility is key. That statement has always been true in both the CG and retail space, and it's only become more important in the face of the COVID-19 headwinds. The good news is that retailers and CGs have always been nimble, and that flexibility was put to the test over the last two years. Those who were able to bend but not break have set themselves up for future success and will be prepared when the next big disruption inevitably strikes.

What are savvy CGs, retailers, and wholesalers doing to keep pace with all of this ongoing disruption? They're continuing to invest in digital tools across production operations and supply chain to ensure both product and resources are where they need to be, when they need to be there. A key piece of that disruption preparedness is having one source of the truth across the operation for both internal and external data. This commitment to streamlining data and operations while automating seemingly mundane tasks allows retailers, CGs, and wholesalers to focus on innovation and providing a meaningful experience for consumers.

I'm going to turn it over to Mike and he will explore how CGs, retailers, and wholesalers, could become more efficient at automating and streamlining internal reporting, particularly in the area of taxes.

Lott: Thanks, Tim. Before I dive into the content, I’d like to introduce Vertex a bit. We are basically the pioneers in tax automation. We're a global company, around for 40-plus years. The Vertex vision is to help accelerate global commerce by reducing friction, increasing transparency, and enabling greater confidence in meeting indirect tax obligations. We like to say that we accelerate global commerce one transaction at a time.

We have thousands of customers; in fact, 59% of the Fortune 500 are utilizing Vertex Indirect Tax solutions. What that means in terms of the individual markets: nine of the top 10 business services utilize Vertex applications for indirect tax, seven of the top 10 communication and transportation organizations, eight of the top 10 manufacturing, and seven of the top 10 online marketplaces. More specifically to today’s audience, six of the top 10 wholesale and six of the top 10 retailers are utilizing Vertex solutions to address the needs in indirect tax.

How do we do that? It's a combination of technology and content, and content is a big key here. Taxes are all about the jurisdictions and how the jurisdictions are setting the rules, then making sure that those roles are translatable, importable, and consumable by the technology. Our technology and content work hand-in-hand to ensure that companies are up-to-date with the changes that are going on in the various jurisdictions.

Also, as you can probably tell with the types of customers that we serve, not everybody's systems work exactly the same and not everybody's processes work the same. We built the technology to be configurable and flexible to meet unique needs, while at the same time being able to associate needs together with what's going on in the jurisdictions.

Then integrations. Dawn touched on the integration with her lead within SAP, but integrating to ERP systems or major e-commerce solutions, those integrations are built-in and managed as part of the overall process that Vertex brings to the market, in order to support indirect tax needs. That is a big piece of who we are and what we've been doing for years now.

We mentioned automation and agility; obviously those can affect all various different parts of your processes, but today we're going to speak to one very specific area, and that's around exemption certificate management, which is a key piece in the wholesale and retail market space. I am the product manager for Vertex’s exemption management piece. For those who don't follow what exemption management is for, it is the piece where transactions should be taxable are not taxed, and you will need to be able to provide proof as to why that has not been the case. Up until a few years ago, a number of these processes were often manual. Nowadays, it's impossible for an organization to manage certificates utilizing a manual process.

When we talk about manual processes, what does that mean? It was often decentralized, wasn't an area for collection that was consistently run across an organization, which meant that you ended up getting a lot of repetitive processes and a lot of repetition that was not efficient. Often, it was performed by people within an organization who were not SMEs as it relates to what needed to be collected, what was going to be able to support the collection process, and more importantly support the reporting and audit piece. While these manual processes allowed customers to go through the motions and potentially get lucky. At the end of the day, that was an area for a lot of errors, penalties, and potentially very large fines during tax audits.

For those of you who are not familiar with how that audit process works, if it was found that you did not have the supporting documentation, the penalties that were associated were the penalties on your revenue, not necessarily the transaction that you did not have the proof for.

We're going to talk today about automating this process, the benefits around that, both cost reduction and increased efficiency, and being able to allow the tax department to provide more value to the business. We’re not just tracking them and going through correcting the issues that had been done through the manual process. We’ll take a look at them, what the process looks like, and then see how automating this will provide benefits in the long run.

This shows four steps that make up the exemption management process. Now, not everybody goes through all four, some may have five, six, or seven, but essentially they all fit into these four areas of first collection. Meaning, how are you getting the exemption certificate from your customer that you need as proof that this sale actually should be exempt? The downfall of trying to do this in the manual process, or the pitfall of trying to do this manually, is that you have no way of being able to collect that in real-time and associate it with e-commerce sales.

If you get a certificate, do you know that it is the correct one? As I said, being decentralized or having people able to collect certificates without necessarily understanding whether or not it is the right one, is a huge piece of collection. Automating the collection piece addresses many of the pitfalls and provides a large value. In fact, when we talk to customers, the collection process is the number one piece of the functional difficulty that they have in the process for managing exemptions.

The second step is around storage. Once you collect the certificate, do you have it stored in a place that is readily accessible? Readily accessible for audit purposes in one case, but also, is it in an area that can be tied into calculations? When you have a transaction from a certain customer in a certain jurisdiction, should or should it not be exempt? Being able to get access to those certificates via a centralized storage is a big piece to that automation process.

The third step is maintenance. Maintenance is another key piece. Many certificates that you receive from customers have some type of an expiration, whether that certificate has come directly from a jurisdiction, or whether it's a certificate that a customer fills out by completing a jurisdictional form presenting to you. In many cases, those jurisdictional forms have expirations based upon the time that they have been presented to you. For example, a Connecticut resale, if it was submitted to you on January 1st, according to the jurisdictional rules of Connecticut, that certificate is valid for three years from January 1st. If they gave it to you January 1, 2021, come January 1, 2024, it is no longer a valid certificate. You need to make sure that you are maintaining those certificates, keeping them up-to-date, getting the right certificate so that when you are exempting tax, you're going to be exempting it correctly and you're being able to prove that out to the jurisdictions.

Finally, step four: reporting. This is pulling together the information that is required. If it’s not automated within the process, trying to go through and run reports is almost impossible. For customers like wholesalers where most transactions are exempt due to selling to the retailers, the retailers will be providing that resale certificate. Without an automated process, being able to report, maintain, and collect those certificates is almost impossible.

Why is this important? According to the California Board of Equalization, unsupported sales for resale — again, which is probably where most of the wholesalers are being impacted — are the second most costly and frequently occurring category of taxpayer noncompliance. More than one in 10 taxpayers actually occurred in this category. This area of noncompliance made up 22% of the net sales and use tax audit deficiencies.

Those audit deficiencies are not based upon, and those penalties are not just based upon, the specific transaction that was incorrect. It is going to be spread against the revenue during that time period, having a tremendous impact on bottom lines.

The other reason why this is important is because as the seller or the collector, you have the burden of proof. The general presumption is that all sales of TPP are going to be subject to tax unless the taxpayer can prove otherwise. Meaning, every transaction is going to be taxed unless you have the reason that it is not, should not be taxed, or the buyer has a reason and is able to provide the specific proof that it should not be taxed.

The other thing that makes this complex is that states have specific rules — states and jurisdictions, really — some lower level jurisdictions have specific rules regarding documentation that you need to collect in order to be able to provide it under audit. Then, that seller has the burden to provide documentation so it goes back to the collection, the reporting, and pulling that data as needed to be able to provide that proof of documentation to auditors.

What does it mean and what is the solution to be able to make this efficient? A number of years ago we developed the first exemption management solution called Exemption Certificate Manager, which is a centralized storage and management tool of the certificates that your buyer is going to be providing to you.

Within that, the collection can be automated, as part of the collection we can validate that the certificate is the correct certificate that is needed for the types of businesses and the types of transactions that are being done. The validated certificates can be stored, pulled, and easily accessible when needed, both from a calculation perspective, as well as a reporting and audit perspective.

Our ECM solution is made up into a number of different components, each one of these components has various automation parts that impact the overall processes. The first part of that is the exemption certificates themselves, the various different types of exemptions. Is it an exemption? Is it a direct pay permit where your customer may be saying, "I've got an agreement with my jurisdiction that I'm going to collect and I'm going to direct pay, so I'm not going to pay the tax to you." Is there a specific type of certificate that is needed based on these kinds of transactions?

For the wholesaler, in most cases you’ll see, it will be resale. There could potentially be certificates from a charity, something from agriculture depending on who the different buyers are. But each one of those reason types are stored at that exemption level and get tied to the individual transaction itself.

The other part is when the transaction is taken, it will be exempt based on the certificate because the system looks to see, is this what's called a blanket certificate, a limited certificate, or a single-use certificate? A blanket exemption would be: is this impact to all the various transactions that you have within your customer? Is it tied only to specific types of products? When we look at single-use, is it really tied to a specific contract? Is it tied to a specific purchase order? Is it tied to an agreement that is made with a jurisdiction during a certain time period?

These types of transactions will be exempt, based upon some agreement that has been made with the jurisdiction. Once these types of certificates impact those transactions, and whether those transactions should or should not be exempt, but also being able to provide those certificates as proof.

One way that Vertex automates this is when a transaction is processed and is exempt by the specific exemption, it will record which exemption was utilized during that transaction. That transaction can be reported against, and the certificate can be pulled to meet that particular transaction.

Now, let’s discuss managing those certificates once you have them. This goes back to the questions: is the certificate going to expire? If it is expiring, how are you ensuring the most up-to-date certificate needed to be able to exempt tax correctly? Our ECM partner, the Exemption Management Solution, provides exemption reporting based upon dates, and provides the ability to run or integrate with correspondence management. Think of it as mail mergers — being able to run batches and filter them to say, "I need to be able to pull out which particular certificates may be expiring in the next 90 days, 30 days, 60 days." Whatever filter you may need and being able to find which certificates they are, create a mail merge, and email directly to the customer requesting a new certificate so that they do not lose the ability to be exempt from tax at the end of that time period.

ECM also handles validation based upon jurisdictional rules. Does the certificate meet and have all of what's needed in order for it to be a valid certificate? Is that tied to the specific reason? For instance, if you look at many of the certificates that jurisdictions create, they have a single jurisdiction-based exemption form to be filled out. The whole form does not need to be done for each area's different pieces.

A customer that doesn't understand and looking at this form, which obviously it's a tax form, can get very confused in terms of what needs to be filled in. As part of our solution, we've built in the ability to look at the pieces of that form and make sure that that form has been completed based upon the type of exemption that the customer is supplying.

The third area is something we call the Exemption Self-Service Portal. The Exemption Self-Service Portal and the Exemption Certificate Wizard is all around self-service and collection. For many of our customers, the biggest pain points from a process perspective is around the collection process. Often, the people submitting these exemptions are not tax people, they're procurement people, they don't know which types of certificates should be provided to you or if they’re filled out correctly. The self-service portal and the use of the wizard is a way for you to provide a tool to clients that can help them through that process step-by-step. Then, they can see, do I have the right certificates in place? The Exemption Certificate Portal allows them to view, have I submitted my resale certificate for Wisconsin, which I know I need in order to be able to be exempt from tax for a specific transaction, or which various jurisdictions are they going to be exempt in doing business with you in.

They have the ability to go into that portal, look at those certificates, look at the specific image, and potentially even print out that certificate. They can also check and be proactive to see whether or not the certificate's going to expire, or proactive in being able to go in and update certificates as they receive them so that it’s there and there's no question they'll be exempt next year when you start to run a resale transaction. It is also customizable in that it will fit within your own branding, appearing as part of the overall way that your customer works with you.

The wizard helps around the collection process. Think of it as the TurboTax way of allowing customers to submit and streamline that collection process. When we talk about TurboTax, it really goes through that question-and-answer type of process. The customer will launch the wizard directly from your portal or website and will start answering questions. What jurisdiction are you submitting an exemption form or jurisdictions? What type of an exemption are you requesting? Like I said, most likely resale but for various different types of reasons, based upon these questions that are upfront, the wizard determines which certificate is actually applicable to the transactions that you are going to be using with this customer.

The wizard will then ask the questions to fill out the certificate. Are you an in-state or out of state registered customer? If you're in-state, what previous provides your certificate, registration, ID, which ID are you utilizing to validate that you are who you say you are? Provide your information as it relates to company name, address, all the things that are going to go onto that certificate. Is this a single-use or a blanket certificate, or is it something that is going to be driven specific to the individual products that are being purchased? These are all things to make it easy for your customer to utilize TurboTax-like questions and answers, get to the end of the certificate, be able to sign that certificate, and have that certificate be automated, automatically submitted to you for your approval.

Regan: Thank you, Mike. I'm going to try not to repeat everything that Mike just said. We had a particular client come to us, a wholesale distributor in business electrical communications and data networking products. They had more than 300 locations throughout the U.S. and Canada, with 250-plus people at these locations collecting exemption certificates. They were plagued with audits; they couldn't find documentation. Some of the documentation was in file drawers, some in folders, and some in piles — this chaos didn't allow them to fulfill their greatest potential and kept opening them for audit exposure.

So what did they do? They came to Vertex and said, "You know what? We've looked at this product and we'd really like to implement the Vertex Exemption Certificate Management Solution.” With that, my team and I (the Vertex consulting team), worked to identify their needs and pain points, where the certificates were located, and what information was needed in the system. Together we came up with a plan that would provide benefits and streamline the process.

One of the biggest benefits was better audit defense. Mike touched on the impact of immediate access and reports to the certificates. If an auditor is coming and saying, "Okay, pull me all those certificates that exempted all of your sales in the month of June, 2019 to 2020, in the state of California," and if you've got 300 locations with 250 people trying to scramble to get those documents together, it's going to take you forever to finish that audit.

The Exemption Certificate Management process enables them to pull a report ahead of time so that when the auditor comes, or notifies them that they are going to come, they could say, "Okay, where are my holes? What is my vulnerability?" They are able to look and see what certificates expired, what was needed, and reach out to clients immediately to get those certificates.

They also found that after they accumulated the certificates from those 300 locations, there were more than 125,000 of them, and they were completely decentralized. By enabling the Exemption Certificate Management Solution, the certificates are now centralized in a location where they can be printed if needed. The company is also able to generate and print reports, reducing manpower from over 250 people maintaining certificates, to just 25 — a huge reduction.