ETRM Systems & Taxation
Why you still need independent taxation
When it’s your job to ensure excise tax accuracy, it can be tempting to rely on the ETRM system to ensure precise tax calculations are reflected. After all, ETRMs are designed to process transactions and generate accurate invoices, right?
Actually, this is a common misconception.
Energy taxation is highly complex and involves frequent changes to rules, rates, and regulations that must be tracked across multiple jurisdictions, products, and tax types. Many energy trading companies assume their ETRM systems are designed to handle these complex taxes and regulatory fees—and the changes that go along with them.
They aren’t. And the potential implications are significant. Because trading energy commodities involve very large volumes, a single incorrectly taxed or exempted transaction can have a hugely negative impact on profit and loss as the company is exposed to increased audit risks and tax liabilities.
At its core, a strong ETRM system is filled with features that enable energy traders to manage positions and optimize portfolios. While they can help drive additional profit potential and mitigate risks through streamlined trading processes, the simple tax tables that come with these systems aren’t built to handle the complexity of many excise taxes.
ETRM Tax Table Challenges
Trading energy commodities is risky business, and ETRM (Energy Trading and Risk Management) systems can be a godsend when it comes to managing complex trades and portfolios. As the backbone of modern commodity businesses, these systems have replaced countless spreadsheets and legacy platforms by consolidating everything from handling logistics to performing basic accounting functions into one simple, streamlined solution.
As Gartner put it, ETRM systems “involve commercial decision making and market execution using an integrated system that enables data exchanges among trade floor, operations, credit, contract and accounting functions.” Their support for trading and risk management of energy commodities is undeniable.*
ETRM systems generally have the ability to account for very basic tax information using a simple tax table. However, excise taxes change constantly, and an inability to account for complex tax rules makes it nearly impossible to monitor and account for changes at the federal, state, and local levels.
The Limitations of ETRM Tax Tables
While Energy Trading and Risk Management (ETRM) solutions can be very reliable for streamlining commodities trading, their tax tables aren’t designed to provide tax content, expertise, or proactive monitoring of regulatory changes—the very thing that’s needed to ensure ongoing maintenance for rule and rate changes around federal and state excise tax, sales and use tax, regulatory fees, environmental fees...and the list goes on.
As excise tax determinations are made, a host of variables will come into play: the origin and destination of a trade, whether it’s occurring at or below the rack, licenses and exemptions...and many other factors that can change significantly from one trade to another. To limit liabilities, the company will need to adjust the system so that it is capable of providing:
- Fast, accurate identification and calculation of all indirect taxes
- Ongoing monitoring to identify tax code changes
- Continual adjustments for changes in tax codes
- Management of counterparty licenses, exemptions, and related documents
It’s more than the average ETRM is capable of calculating.
Common Complex Rules
Companies that rely on ETRM systems without another process in place for handling complex tax rules risk unhappy customers, profit losses, and increased audit liabilities.
For example, consider this real-life scenario:
A large trading company had sold a dyed-RHD (Renewable Hydrocarbon Diesel) product from a marine terminal that would be shipped via barge. Since dyed-diesel fuel is always tax exempt, neither the buyer nor the seller gave taxes a second thought.
For a standard dyed-diesel transaction, clear product is typically shipped via pipeline from terminal one to the marine terminal, where it is dyed before being placed on the barge. Since the product stays in the terminal system and never breaks bulk prior to being dyed, no federal excise tax is due.
However, in this case, the clear RHD at terminal one could not be shipped to the marine terminal via pipeline. Instead, it was sent via truck. Because this was considered a break-bulk transaction with removal from the terminal system, federal excise tax was due on the movement from terminal one to the marine terminal. Even though the RHD was eventually dyed, the taxes were applied on the clear fuel and an exemption and refund could not be claimed.
This trader’s customer was accurately invoiced for the federal excise taxes of 24.3 cents per gallon—but was far from happy about it, especially when they discovered that the tax was not refundable. If the trading company had used a system to calculate indirect tax as part of the trade evaluation and sales order, this tax liability would have been discovered and alternate arrangements could have been made. But neither the company’s ETRM system or custom-coded tax tables were capable of handling these complexities.
Accurate calculation of indirect taxes depends on dozens of fluctuating factors ranging from product types to licenses to locations—and these can change at any time. ETRMs aren’t designed to monitor for changes in tax codes or track ever-changing regulations that impact energy transactions. Excise tax engines are.
Monitoring Indirect Taxes with AvaTax Excise
Avalara’s AvaTax Excise offers a single, streamlined solution for indirect tax determination—one that can be integrated directly to the pricing process of any ETRM system. Once connected, commodity traders can rely on AvaTax Excise to:
- Determine and calculate indirect taxes due on any energy transaction
- Handle monthly rule and rate updates and ensure on-going tax accuracy
- Track counterparty licenses and exemptions, further ensuring tax accuracy
- Handle complex tax rules as well as custom fees applicable to energy trades
- Ensure accurate invoicing and government compliance
Each time the ETRM prices a trading position, applicable indirect taxes and trading fees will be included. Excise taxes, environmental taxes, and sales and use taxes are all supported. This eliminates the need to build out in-house tax expertise and monitor tax changes, and eliminates considerable risk of tax errors and audit liabilities.
Once your ETRM is connected to a specialized tax engine with updated rules and rates, managing indirect taxes becomes exponentially easier. Creating a direct connection from Avalara’s AvaTax Excise to your ETRM system—be it Allegro, SAP, or another system—ensures tax accuracy without putting any extra burdens on IT or accounting.
The Team Behind This White Paper
Avalara helps businesses of all sizes achieve compliance with sales tax, VAT, excise tax, and other transactional tax requirements with a range of solutions that are fast, accurate, and easy to use. Avalara’s suite of automated, cloud-based excise tax tools is constantly updated to provide built-in support for federal, state, and local jurisdictions as rates and regulations evolve.