By Dan Campbell, Supervisor, Sales & Use Tax Compliance
A wise Mr. Benjamin Franklin once said, “There are only 2 things certain in life: death and taxes.” But how you process the payment of those taxes is not so certain. In the case of electronic sales tax payments, you have two options that have both a time and a monetary impact. What’s best, an ACH Credit electronic payment or an ACH Debit electronic payment? Here are some tips about your options, and how to choose what will work best for your organization from an efficiency and cost perspective. I’ll start with the basics…
ACH is Your Electronic Payment Network
The movement of money and information from one bank account to another in the U.S. is handled by the Automated Clearinghouse (ACH) Network. The not-for-profit association, NACHA, manages the ACH Network. With the ACH at the center of 23 billion electronic financial transactions totaling over $40 trillion dollars per year, they pride themselves on being one of the largest, safest, and most reliable payment systems in the world.
Payments: ACH Credit vs. ACH Debits
Direct Payment via ACH is the use of funds to make a payment. Individuals or organizations can make a Direct Payment via ACH as either an ACH Credit or ACH Debit.
- A Direct Payment processed as an ACH Credit PUSHES funds into a designated account. An example of this is when the user initiates a payment through his/her company’s bank to be deposited into a state’s bank account in order to pay a tax bill.
- A Direct Payment processed as an ACH Debit PULLS funds from a designated account. An example of this is when the user establishes a payment for a tax bill to be debited from his/her company’s bank account by entering his/her company’s bank information on a state website.
Why Choose ACH Credit vs. ACH Debit?
The short answer to this question is effective time management, cost efficiency, and mitigation of risk. But let’s dive a little deeper. Many organizations are currently using the ACH Debit option – mostly because it is the easiest to execute short-term. The trade-off for ease of use is high risk.
Individual vs. Batch
ACH Debit payments can only be made individually, so not only do they take more time, but there is more room for error. The websites used for payments come in many different varieties/platforms which vary in use. Users are either forced to manually key the payment amount or automatically generate the payment based off of the tax return filed. Manual entries always run the risk of transposition errors or typos, and automatic payments run the risk of inaccurate return submission and expected payment alignment.
ACH Credit payments can be automated, which significantly lowers the risks mentioned above. ACH Credit payments can be submitted in batches. A company can generate ACH Credit batches by parameters (i.e. by company, by due date, by jurisdiction). Once setup, this allows you to enter the bank information once for a batch of multiple tax transactions in a uniform format. It also allows for a company to setup bank account information for each of their vendors just once, and link any future payments to that vendor automatically. By linking payments to vendors that have already been setup in the system, you can confirm prior to releasing the payments that they are accurately being reported.
Reconciliation
ACH Debit payments can also cause an issue with the reconciliation process. There is no guarantee that the amounts paid match to what was expected in your General Ledger (GL) or payment summary. When reconciling your bank account, you will have to tie to each individual transaction to confirm its accuracy which can be time consuming. Banks may also impose ACH Debit blocks on unauthorized ACH transactions. These blocks will result in a cancelled payment and late payment fees if not setup in advance with your institutions.
ACH Credit batches are easier to reconcile (even prior to submission). They are paid in batches, so rather than 100 individual ACH Debit transactions, you release 1-5 ACH Credit batches organized by due date. By comparing these batches to the expected payment amounts prior to submitting payment, you can guarantee that the money the jurisdiction received is what you expected to pay. These same batches will show up on your bank detail, making bank reconciliations far easier.
To create an ACH Credit Batch you need to create the addenda record, the piece of data that tells the taxing jurisdiction what taxpayer, tax type, and period the payment is for. Addenda records vary by state and may not be easy to produce so you want use an automated approach (for which there are many!) for creating your batches each month.
The Facts
When mapping out the functionality of the two transaction options, the pros of ACH Credit far outweigh those of ACH Debits. The overall benefits are efficiency, cost savings, and lower exposure to risk for your tax department, so you can focus on more strategic tax initiatives. ACH Debit is convenient, but does not offer as many benefits as ACH Credit.
| ACH Debit | ACH Credit | |
| Upload transactions by due date | √ | |
| Effective dated transactions | √ | √ |
| Lower margin for error | √ | |
| Does not require technical expertise | √ | |
| Batch release transactions | √ | |
| Does not require individual logins and passwords | √ | |
| Separate payment from filing | √ | |
| Individual transactions | √ | √ |
| Schedule payments ahead of time | √ | |
| Confirmation numbers for payments | √ | √ |
| Protected from ACH debit blocks | √ |
Work Smarter, Not Harder
With fewer resources to reduce overall tax liabilities, the execution of fundamental activities must be balanced within an environment of new technologies, rising costs, and greater regulatory complexity. Take the time to look at the nuances of long-term and more efficient solutions to monthly transactions that you otherwise take for granted in order to find innovative and better ways to execute.
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