Often, simply gathering the internal data that is needed to calculate sales and use taxes represents a significant time investment. Systems including the point-of-sale (POS), general sales ledger, billing and ERP, as well as ecommerce all need to be tapped and the IT department is generally required. If the retailer keeps its brick-and-mortar and ecommerce sales separate, these sales must be aggregated if the business is registered as a single filing entity. However, sometimes sales tax needs to be reported by location. In addition, for retailers that sell through third-party marketplaces, these need to be integrated with sales from other channels. SMB retailers can simplify both the data gathering and calculation parts of their processes with a centralized tax management system.
This type of solution can handle data from multiple sources and in various formats, calculating the taxes owed and generating the appropriate returns for individual jurisdictions and due dates. A centralized sales and use tax management solution also simplifies record-keeping, including key paperwork such as exemption certificates for non-taxable items or exempt customers and previously filed sales and use tax returns. The need for comprehensive record-keeping in case of an audit is more pressing than ever, given states’ pursuit of sales and use tax revenue.
“The desire for revenue has led states to more aggressively assert nexus over out-of-state corporations in both the income tax and the sales and use tax arenas,” according to Bloomberg BNA’s 16th Annual Survey of State Tax Departments, as stated in a May 2016 Accounting Today article. The article also noted a range of states’ recent challenges to the Quill decision that governs most nexus determinations, including Ohio’s assertion of a theory of Internet nexus that would create taxable presence every time a retailer’s web site is accessed by a customer in the state.
Not keeping up with tax rate rules and changes could lead to expensive fines and time-consuming audits. Businesses are often selected for audits for various reasons such as:
- Across geographic areas and industries,
- A pattern of inconsistent sales or use tax reporting,
- Improper use of exemption certificates,
- A history of discrepancies, or
- A tip received from an employee.
When your business is contacted for an audit, here are some general guidelines to follow:
- Respond to all letters, phone calls, and request for additional information in a timely manner.
- Decide if a third party, such as your accountant or bookkeeper, should be involved in the audit.
- Make sure that an on-site work area is made available to the auditor.
- The auditor will review confidential information, find a location that is as private as possible.
- The auditor will ask for various records and reports.
- If the records and reports are not readily available, let the auditor know when they can be provided.
- You may be asked to provide the records and reports electronically, if possible.
If you are selected for an audit by a taxing authority the process will generally be something like this:
- You will be contacted by phone, letter or email.
- The auditor will tell you which records and reports will be required for review.
- You and the auditor will set a mutually agreed upon date, location and time for the audit.
- You will receive a confirmation letter. You will also receive any additional forms that must be completed. For example, if you want a third party accountant or bookkeeper to be involved.
- Before the audit begins or at the initial meeting, the auditor will discuss your business activities.
- The auditor will also discuss with you how your records are maintained.
When the audit commences a variety of required records and reports will be examined so as to:
- Review total sales, exempt sales, nontaxable sales, taxable sales;
- Review documents supporting deductions taken;
- Review sales tax accrual accounts;
- Review expenses;
- Review use tax liability/accrual accounts, and
- Review purchase invoices to verify that sales/sellers use tax has been paid or consumers use tax has been accrued.
At the completion of the audit, the auditor will discuss all preliminary findings and explain the following:
- Any interest or penalties due;
- The appeals process and any hearing or conference procedures if you disagree with the auditors findings;
- Before the audit findings are finalized, the audit will be reviewed within the Department of Revenue/Taxation;
- If the audit results in no change, you will receive a letter stating that there are no tax adjustments;
- If the audit results in an adjustment, you will receive a document and supporting schedules explaining the audit findings, and
- You will also receive an invoice for the taxes, penalties, and interest you own with a payment due date.
For more information read 5 Steps to Simplify Sales and Use Tax for Retailers.