EDI and the tax department.

Introduction

This quarter's column is written by Jan Crangle, Manager, Office of Appeals, South Carolina Department of Revenue. Long-time members of the Tax Division will recall the red buttons with the one word message, "Simplify," that were passed around during Tax Division meetings. Ms. Crangle's article is a clear statement that, while the tax law may be complicated, the process of doing business is becoming equally complicated. Tax Division members and accountants of all types must become comfortable with the world of digital data, computers, electronic communication and networks. In a broad sense, electronic filing of tax returns is the first exposure any tax practitioner has to electronic data interchange (EDI). This introduction to EDI in the middle of tax preparation season is a necessary wake-up call. Practitioners must keep up with computer technology, or they will look up from their tax books to see clients going to those who are more technologically adept.

Electronic Data Interchange

EDI has been identified by the AICPA Technology Division as one of the technologies that will have the greatest impact on the accounting profession and business. While many in the profession have considered EDI to be limited to the biggest companies with the most sophisticated data processing departments, it is becoming clear that the technology is rapidly filtering down, and (unfortunately) the tax department is sometimes the last to be informed of its company's entrance into the EDI arena.

Reduced to its most elemental components, EDI is computer-to-computer exchange of business information in a standard digitized format via modem. EDI allows trading partners to eliminate the costly and time-consuming process of generating and mailing paper documents that are then retyped and entered into the receiver's computer. Not only does modem transfer avoid mail delays, but by eliminating the need to re-key, errors are also reduced. (It has been estimated that from 75% to 80% of the information printed from a vendor's computer is re-keyed in the purchaser's computer.)

X12, a designation of the American National Standards Institute (ANSI), is the electronic standard that allows EDI to work. In X12, ANSI has created "transaction sets" of common business documents (such as purchase orders, invoices, ship notices, etc.). Through X12 transaction sets, computers that would otherwise be incompatible can now communicate.

Typically, in the present environment, third parties (value added networks, or VANs) provide the electronic interface through tracking, storage and forwarding services, translation services, etc. VANs also eliminate certain security risks and compatibility problems that would be encountered through direct contact. With the rapid expansion of electronic commerce traffic on the Internet, some predict the need for VANs will be eliminated in the near future.

"EDI is definitely moving full speed ahead," stated David Mays, a computer-assisted audit specialist with the South Carolina Department of Revenue. Mays noted a taxpayer survey conducted by his department in early 1995 which indicated that 44% of the taxpayers remitting between $250,000 to $500,000 in sales and use tax annually to the state were currently using EDI, with an additional 20% of these accounts planning to be active in EDI within the next two years. Already 50% of the Department's largest sales and use tax accounts are using EDI. Mays noted that many of the big vendors were requiring even their smallest suppliers to set up EDI. "It's not hard for the small business. They contract with a VAN and use an electronic mail box similar to that used by a credit card account. We estimate over 14% of our taxpayers who remit less than $250,000 in sales tax to the Department are already involved in EDI."

Dan Taylor, Director of the Auditing Division, West Virginia Department of Revenue, and Chair of the Southeastern Association of Tax Administrators (SEATA) Information Exchange Committee, indicated that states are looking very seriously at how to audit in the EDI environment. "Since EDI is generally set up through the data processing and finance departments, we sometimes find that the folks who do tax accruals aren't receiving the information about the transactions. The proper accruals cannot be made if the tax department doesn't receive information on the transactions. SEATA is working hard, not only to educate our auditors but also the tax departments about proper recording of EDI transactions."

Debra Abbott, Director of State and Local Taxes for the Coca-Cola Company, indicated that her company has been involved with EDI for over five years. "The savings and benefits associated with EDI include a reduction in resource needs such as time, manpower, and paper. Many companies are refusing to conduct business with you if you are not using EDI for transmissions of information." Abbott, who serves on the Board of the Committee on State Taxation (COST), advised that COST, the Federation of Tax Administrators, the Tax Executives Institute, the Multistate Tax Commission and the Institute of Property Taxation are actively studying the effects of EDI on business. A joint government/industry task force comprised of members of these organizations has been established to deal with issues relative to records retention and audit procedures. In 1995, the Coca-Cola Company and the Florida Department of Revenue entered into a joint study of audit issues in an EDI environment, with emphasis on finding solutions to problems created in auditing paperless transactions.

More About EDI

To learn more about EDI, check out the subject on the Internet's World Wide Web, which has a variety of excellent sites on the topic. Start at the Electronic Commerce World Institute's home page (http://www.ediwi.ca:6900/welcome.html) for a broad overview, complete with a "Beginner's Corner" and numerous links to other sites.

In addition, the AICPA has publications addressing EDI issues. The Auditing Standards Division's Audit Risk Alert-1994 addresses some of the concerns facing auditors in an environment that includes client-server computing, Internet commerce, and EDI. EDI Control, Management and Audit Issues (AICPA product no. 043004) provides an overview of the issues facing auditors. The AICPA also has published several audit procedure studies (APS) that may be of assistance, including Consideration of the Internal Control Structure in a Computer Environment: A Case Study (AICPA product no. 021055JA); Auditing in Common Computer Environments (AICPA product no. 021059JA); Auditing with Computers (AICPA product no. 021057JA). As EDI becomes more universally accepted, tax practitioners will be asked for advice, since contacts with state agencies usually come through the tax department.

Tax Division members may also be interested in joining the AICPA's Information Technology Section, which focuses on breakthroughs that can help CPAs and gives expert advice on implementing them. Topics addressed in their recent publications include software reengineering, security issues, operating system guides, etc. For more information on the Information Technology Section, contact Nancy Cohen, CPA, at [phone], or e-mail her at [e-mail].

Editor's note: Dr. Hicks, Mr. Rubenstein and Ms. Crangle are members of the AICPA Tax Division Tax Computer Applications Committee.