ARTICLES

Planning for Sales and Use Tax

Business owners rarely anticipate a sales and use tax audit. Surprises can be avoided only by careful planning for sales and use tax liabilities. Failure to record and pay sales and use tax liabilities is expensive in terms of penalties and interest, but also, costly in terms of employee-hours. A taxpayer operating without the appropriate procedures can expect increased attention from a sales and use tax auditor, lengthening the term of the audit and causing staff and management aggravation. As a tool for preventing unexpected tax liabilities and reducing penalties and interest charges we suggest the following review process.

Review all company sales:

Assume that all sales of either goods or services are taxable, then ask:

• Are any sales exempt due to their nature, such as food and clothing?
• Are any sales exempt due to the location of the purchaser, such as deliveries out-of-state?
• Are any sales exempt due to the nature of the transaction, such as a purchase for resale? If so, the reseller’s tax certificate including the re-seller’s tax number must be obtained before making exempt sales and the certificate must kept on file.
• Are any sales exempt due to the exempt nature of the organization? If so, determine what must be done to ensure the exempt status of the sale. Please be aware that the submission of a re-seller’s tax number is not adequate to support the exempt status of a purchase by an exempt organization if the goods are not for re-sale.

In general:

All invoices should be reviewed at the time of entry into the accounting system to ensure that the appropriate use tax liability is recorded contemporaneously. This process should include all credit card charges, direct payments and employee reimbursement requests.

Every class of exemption should be supported in the records of the company by specific language from the statues or publications of the Department of Revenue. If such exemptions are not easily identifiable, a legal opinion should be obtained.

A good process for recording sales and use tax transactions will facilitate filing periodic sales and use tax reports, increase the accuracy of financial statements and improve internal control of the company.