Tax Data Management - Fourth Issue, 2001

This is a newsletter from J.D. Choi of Tax Technologies, Inc. to tax professionals whose interests are improving the tax management processes.

Table of Contents

1. Web Tax Software Cost/Benefit
2. EURO Conversion

Web-based tax software is the talk of the town these days. TTI has been offering its web-based international tax software since early 2001, RIA has been offering remote server applications and CORPTax recently released its web-based tax software. Further, CORPTax announced that it plans to transition its current file server and client server accounts to the new web technology platform. Given the fact that most tax software vendors are offering web-based tax software, it is important to understand the cost and benefits of using web solutions for your tax department. Accordingly, I will discuss the truth about web-based tax software in this issue of Tax Data Management. In particular, I provide criteria to evaluate web-based tax software: cost analysis and potential benefits compared to traditional software offerings. I also discuss EURO conversion issues since many companies will need to convert their historical tax attributes to EURO before the start of tax year 2001 compliance season.

1. The truth is out there...

Recently, almost all corporate tax software vendors announced the availability of web-based tax software. So what is the big deal? There are a number of potential benefits, as well as limitations in using web-based tax software. Both the potential benefits and limitations need to be considered in making purchasing decisions. Since most of you will be facing purchasing decisions soon, I decided to go through some of the basics in evaluating web-based tax software.

Discussion overview:

Note #1 – Discussion is based on a true web-native product (essentially the same program) being used in two different environments: corporate intranet or ASP. Answers would be different if the application being run on a corporate intranet was a "web-based" application as opposed to a "web-native" application. The cost estimate is based on a medium-size tax department.

A) Cost of ownership:

In evaluating the cost of using any web-based tax software, you need to compare the total cost of using web-based tax software in comparison to PC based tax software. In general, total cost of any tax software consists of hardware cost, software license cost, maintenance cost, implementation cost, and training cost.

1) Hardware cost:

Hardware costs consist of two elements: servers and client workstation computers. Generally, PC based software installed on a server requires one high performance server and high performance client workstations because the processing of data is allocated between the two computers. In addition, because some tax software requires dedicated servers (mostly because the software itself can cause hardware failure), companies may not share a server for tax software with other server based applications. At current pricing, servers for most of the PC based tax applications may cost $15,000 to $30,000 and workstation computers may cost $2,500 to $3,500 per workstation. So, if you have a tax department with a large number of tax accountants, the incremental cost of an additional workstation is fairly significant.

Another hardware issue with PC based software is scalability. Most PC based tax software requires replacement of servers if the usage reaches its maximum capacity because most current tax software does not allow for distributed processing. Scalability is a particularly important issue for large companies or client service companies such as accounting firms, since they have a large number of users that require a large number of servers and high-end workstations.

In comparison, web-native software allows most of the processing, if not all, to be done at the server level. Thus, it will require a high performance server similar to that of PC based application. However, since it requires none or very little resources from client workstations, companies are not required to upgrade the workstations for the sole purpose of accommodating the tax software. Based on our testing, there is little difference from a user’s perspective whether a client workstation has a slow 233MHz processor or a fast 1.2GHz processor. Also, because web-based software architecture is scalable, companies may add additional servers as requirements grow over time instead of replacing an existing server: number and configuration of servers is more dependent on volumes of data, not the number of users. It should also be stated that even the older, slower servers could be used as part of the servers for the web-based software.

If a company chooses to use a hosted solution using an ASP (Application Service Provider) model under which the licensor of the tax software also provides access to a shared server, the company can further reduce the cost of hardware. Most web servers are high capacity servers; therefore, they can be shared very cost effectively by a number of companies eliminating a significant portion of hardware cost. In short, as your company migrates to web-based software, overall cost for hardware should be considerably less than PC based applications.

2) Software license cost:

Companies using corporate tax software are paying a significant amount of money for the privilege. The licensing cost of most corporate tax software depends on several factors. Mostly, licensing cost depends on which module you license from a vendor. Some of the software-licensing fee is based on the number of installations at different geographic locations. It is also based on the number of users since the software must be installed on each of the client workstations that will use the tax software. In some cases, it is also based on number of companies the licensee has in the database.

Most tax professionals are aware that there are hidden costs associated with licensing tax software. These include the licensing cost for database and other software needed to run the tax software. For example, if a company uses a client server version of tax software, it will have to license the database programs separately from the tax software. Currently, a large number of companies are using Oracle, IBM DB2, Microsoft SQL Server or Sybase to run their client server database applications. In addition, most of these database licenses are based on the number of processors in a server. Most of the servers have dual processors or quad processors and, consequently, companies must pay a multiple license fee to the database program providers. Thus, if a company has multiple sites with multiple licenses for tax software, it must take into consideration all the hidden costs associated with distributed processing.

Since web-based tax software allows centralized processing for a large geographic area without requiring separate software installations, licensing costs for tax software and related database programs are reduced. For example, a company with four sites would have to pay for four site licenses for tax software and four licenses (multiplied by the number of processors in the servers) of the databases in order to use the PC based tax software. In comparison, web-based software would require one license of one site (server) and one database license. Accordingly, the cost savings for using web-based software can easily reach $100,000 or more depending on your company's licensing structure. Further, if a company chooses to use ASP solutions, such as our hosted solutions, the company may totally eliminate the license fee for the databases in addition to hardware acquisition costs.

3) Maintenance cost:

Web-based tax software, on the other hand, only requires updates to the server because no software is installed on the workstations. Since a single server can be used for multiple sites' tax processing, maintaining web-based tax software becomes much simpler than having to synchronize the servers and workstations. In addition, under an ASP model, it becomes the responsibility of the service provider to update its program.

Both backup and disaster recovery are burdensome, time consuming and expensive. In a PC based or a web based intranet deployed tax system elaborate plans and procedures need to be in place to enable the quick restoration of data and to ensure alternate work sites if the primary site becomes disabled. In a hosted or ASP solution, the vendor would be responsible for all maintenance items including backup and disaster recovery. By the way, disaster recovery using an ASP application like ours is simple. If you’re primary work site is disabled you can access the application from any computer connected to the internet, this could be your home or a new or temporary worksite. If the primary site is disabled the vendor maintains a redundant site which is in another geographic region of the country that can be up and running within an hour with virtually no data loss.

Frequently corporate tax departments are "allocated or charged" for maintenance cost by the corporate IT group to maintain a server. All of these costs would be eliminated using a hosted or ASP solution. Accordingly, companies that opt to use web-based software should expect a reduction of maintenance costs as well.

4) Implementation cost:

Most of the PC based tax software requires installation of software at the server level and at the client workstation level. During this installation, some of the executable programs are installed on the server as well as the workstations. This type of installation causes a number of issues: hardware incompatibility, operating software incompatibility, driver incompatibility, conflicts with other software and a host of unknown installation problems for a fairly good number of computers. Again, this is a significant issue for large companies and accounting firms because different offices may use different computers, operating software and different software applications with different drivers.

Web-based software has very few compatibility issues because all the installation is done at the server and it does not require (it should not require) installation of any executable programs at the client workstation level. Thus, most of the installation issues would disappear as your company migrates to web-based tax software.

The only compatibility issue a client workstation has is browser compatibility. Because the development of web-based software is dependant on choice and versions of browser, if a client workstation does not have a correct browser, it may cause incompatibility issues. In fact, some of the companies we worked with have very rigid browser standards. However, since most of the browsers are free and most companies do not enforce a rigid browser standard, I do not consider it to be a significant implementation issue.

5) Training Cost:

In addition to the time spent on training, most training cost is spent on travel and lodging expense. Also, effective use of tax software is compromised by the time lag between the training and actual use of the software.

Training becomes a bit easier using web-based software. There are products, such as Net Meeting or WebEx, which allows training across the Internet. Since web-based tax applications are compatible with such products, training can be done without having the users travel across the country. Even without such tools, companies can go through the training over a conference call since all participants would have the same access to the same screens at the same time. This real-time ability of the Internet allows training as part of the actual use rather than having a separate training well before the use of the software.

B) Potential benefits of using web-based tax software

1) Technical support:

The benefits on technical support can vary significantly based on how a company decides to implement the web-native software. If a company decides to use a hosted solution based on an ASP model, the company can enjoy a tremendous benefit to technical support, both in terms of cost and quality. However, if a company decides to implement the web-based software into its Intranet and host it within its firewall, it may only have a marginal benefit to technical support. In either case, the company is not worse off in comparison to the technical support with PC software.

Many times during the compliance season, users may have questions regarding system reports and errors. If the issue is significant enough, the user has to backup the database and send it to its vendor to have the vendor replicate the problem and address the issue. This process of technical support takes a long time and, in some cases, results in no adequate resolution because the vendor may not be able to replicate the problem since the vendor installation environment may be different from the client installation environment.

Under the ASP model, client data resides in a vendor server. Also, technically, all users including the technical support staff share the same version of the software application. Further, there is very little difference between the client environment and the technical support person’s environment. Similarly, for an Intranet solution, a client can allow the technical support person to access the Intranet application by creating a temporary user account for the support person. Accordingly, the technical support person is looking at the same report and errors as the client using the same version of tax software. This sharing of data and application across the Internet enables the technical staff to see exactly the same issue at the same time that a client is encountering without having to independently recreate the problem. Often times, a technical support person can walk a client though a problem or issue while they are on the phone looking at the same screen.

2) Global access:

It is given that web-native tax software would allow global access. However, the implication of global access on business is in my view somewhat under estimated.

It is true that a tax accountant can work virtually anywhere on any computer as long as there is an Internet connection available. Further, access to web-based software can be controlled centrally since web-based software can be administered from one server serving multiple business locations. This global accessibility and central control has far reaching consequences from a business perspective, in particular, cost.

Currently, the majority of the workforce is concentrated in large metropolitan areas because that's where the businesses are located and most of the administrative functions, including the tax compliance function, are performed. As companies begin to use web-based business software, business functions can move to lower cost areas. For example, if the cost of hiring a tax accountant in San Francisco is much higher than that of Houston, the job function can move to Houston without compromising the central reporting capability. In an extension of this approach, some of the largest companies are moving jobs overseas for non-essential administrative functions. Under this approach, a large portion of the tax compliance function can move to countries like India for lower cost of tax data processing.

Further, the work can move to an optimal location rather than corporate headquarters with improved reporting. The prime example of this is foreign tax reporting and corresponding US tax compliance. By using web-based software, a company can have its foreign affiliates enter the data directly into the tax systems and have the compliance done in a central location without having to send the tax data back and forth. Companies can also have local accountants in foreign countries import the financial results directly to the tax system and have the data processed for US tax reporting.

Most importantly, removing the geographic limits of being able to use software applications would allow companies to have greater flexibility as to how companies can work together in the future. Like any other business issues, companies will adopt the measures that will minimize the cost over the long run.

3) Security:

Many companies express concerns over the security issue when discussing web-based software. I think the concerns are a reflection of highly publicized hacking of websites by hackers rather than based on any close analysis. Although no system is hacker proof, I believe using web-based software offers more security than that of PC based software. In order to analyze security concerns with regard to tax software, companies need to evaluate the security concerns both from the perspective of data security and access security.

In terms of data security, most PC based applications allow for data to be portable (i.e. data can be stored and/or moved to various computers), web-based application store data in servers behind a hosting center firewall. For example, while using PC based tax software, it is common to send copies of the database to a software vendor in order to receive technical support. Further, some software applications require a piece of data to be stored in a client workstation. This portability of data required by PC based tax software applications leaves a large security hole for someone looking to gain access to tax data.

On the other hand, all of the data for web-based software is stored in web servers. Further most of the web servers are placed behind the firewalls managed by hosting companies. In fact, the access to most of these hosted servers is as difficult as accessing most corporate networks. As such, the security risk with regard to data security is much less with web-based tax software applications than PC based tax software.

In terms of access security, there are many elements by which access security should be measured: security with regard to physical access, password encryptions, password expiration, network connection, etc. The benefits of global access afforded by a web-based application do not compromise access security. In fact, well-developed web-based software takes into account the security as part of its basic architecture. Further, access to the server by using web-based software is limited to ports 80 and 443 (for standard http:// and https://) if it is truly web-native. Access through these ports severely limits the access to the database and applications and allows for use of industry-standard security techniques including 128-bit SSL encryption.

In comparison, most of the tax software currently being offered as web-enabled software is using a remote access application such as Citrix to simulate web-like behavior or they require dedicated line access and allow limited remote access by users. Using PC applications through these means leaves more security gaps that in turn may raise concerns by corporate IT groups for it may jeopardize corporate network access by unintended intruders.

It is also true that tax data may not be the most popular target of hackers. Nevertheless, the security concern must be addressed to prevent a security breach to the corporate network. I believe, based on the technical analysis, using a true web-native application would enhance security; contrary to popular belief that security is a concern for using web-based software.

4) Software stability:

I am quite sure that many of you have experienced computer errors during the compliance season. When it happens, you must restart the workstation and, sometimes, the server. This is particularly troublesome if you are using a remote server application because the effects of server error may not be apparent to the remote users.

As a web-based tax software vendor offering ASP solutions, we cannot afford to have an unstable application since the server error would impact a large number of customers and the maintenance of the server is the responsibility of the vendor. Accordingly, most software offered as ASP solution tends to be better-tested and more stable than competitive PC applications. This fact is particularly important in tax applications since the complexity of tax calculations can expose hardware and application failure. Accordingly, a company evaluating web-based software should consider if the vendor also offers an ASP solution.

5) Tax data sharing

Tax reporting requires an extensive collection of corporate and financial information. Unfortunately, the use of most tax compliance and planning data is confined to tax departments largely because it is very difficult to share such data across the company using current PC software. However, the data collected for tax compliance is very far reaching and could be useful to others in the company. For example, entity ownership information for tax reporting is generally more accurate than that of the legal department and knowing the effective tax rate on a potential dividend is very valuable information to the treasury department when evaluating the sources of dividend repatriation. Use of web-based software would enhance data sharing across the company. As discussed earlier, web-based tax software allows global access to any user across the company. This means that a user from different parts of a company can have limited access to the data collected for tax compliance based on that user's predefined access rights. Further, web-native software enhances data exchange across other web-based applications through common data exchange platforms, such as, XML or XBRL. Accordingly, the use of web-based software for tax data processing would enhance the cross-usage of enterprise information across many different parts of a company. XML will also be used for future electronic tax filing as announced by the IRS. Therefore, the use of web-native tax software would not only enhance the internal sharing of tax data, but also the external reporting of tax information in the future. In conclusion, the use of web-based tax software would significantly reduce the total cost of operating the tax department while enhancing the use of tax data across large parts of the company. In addition, if a company chooses an ASP solution, it can remove almost all IT functions out of the tax department while significantly reducing costs.

2. Form 8865 - the second year issues  » Return top

So, what's new this year? There is very little change to the form itself. However, since most companies have filed the first return for tax year 2000, tax year 2001 will have to take into account the returns filed for the prior year. This means that there are a number of reconciliations that need to be done as part of second year compliance. For example, schedule M2 and partner capital accounts will have to be reconciled to the prior year returns. Although it may sound simple, it may not be that simple since partnership accounting is only done for US tax reporting purposes while the supporting financials are generally prepared for foreign corporate reporting purposes.

Our Tax Series software fully supports Form 8865 and can help facilitate the compliance process. An overview of the product can be found at www.taxseries.com.

3. Mark your calendar   » Return top

March 25 and 26, 2002 - Chicago
I will be presenting the Form 8865 compliance issues.

For additional details, visit http://www.fdta-cite.org

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Regards,

J.D. Choi
CEO, Tax Technologies, Inc.
201-387-9451