Inflated sales figures are a nightmare on a cellular level. Some taxpayers inadvertently inflate reported total and /or taxable sales figures by including sales tax in the amount reported. Sales and use tax collected from customers is NOT your money. The money belongs to the tax authority. The tax collected from third parties should not be included in sales figures reported to state (or federal) tax authorities.
For example, the Texas Comptroller of Public Accounts makes it clear that collections of sales or use tax are not to be included in amount reported as “Texas Taxable Sales,” i.e. line 2 of the Texas sales and use tax return. When sales figures include sales or use tax collected from customer the following issues ensue:
Inflated Sales Issue 1: State tax authorities are paid too much money
When taxable sales level are inflated, sales and use tax remitted to the taxing authority is more than the company collected from customers. Tax is being remitted on tax. The goal of the taxing authority is not to tax the preparer on sales and use tax collected for the state. The goal is to collect the tax that was collected from customers on taxable transactions. The mistake is costing you money.
Inflated Sales Issue 2: Too much income tax is reported to the federal government
If sales reported to the Internal Revenue Service include sales or use tax collected from customers, the sales figure includes money that does not belong to you. You are paying tax on money that you did not earn and (hopefully) did not keep. The goal of the tax authority is to collect tax on your income–not money that belongs to the state. Again, the mistake is costing you money.
Inflated Sales Issue 3: Business decisions are based on incorrect data
If sales figures used to make internal decisions or used as the basis of reports given to your bank or other lending institution include sales or use tax that was collected from customers, decisions are based on incorrect information. The mistake may trigger business decisions that may not have been made if the true sales levels were known. This mistake can compromise the general health of your business because budget projections and the incurrence of debt, if any, are based on inflated sales levels.
Inflated Sales Issue 4: Statute of limitations limits recovery of tax overpayments
The good news is you can correct the mistake and get the money back. The bad news is that you must recover the money within the statute of limitations applicable to the taxing authority. Worse news is that refund claims are routinely audited. Don’t expect that you won’t be required to prove the mistake to every taxing authority from whom you seek a refund. The statute of limitations varies by jurisdiction. The level of scrutiny that refund claims enjoy also varies by jurisdiction.
“Do I include sales or use tax in my “Total Sales” and “Taxable Sales” figures?” is a common question. The question raises an important issue. Be careful that you adhere to instructions given by the tax authority when compiling tax returns and maintain a clear audit trail for the applicable statute of limitations. This makes it easier to avoid errors and seek a remedy if a mistake is made.
The inclusion of sales and use tax in sales figures routinely happens especially when taxpayers have tax-included sales. Make sure you review your accounting practices especially when a new staff person files returns, and software to ensure the sales figures do not include sales or use tax collections. Interim reviews are advisable to identify and correct systemic issues before audits occur and before tax overpayments are lost to the statute of limitations. ALWAYS read the instructions before and when filing sales tax reports. An ounce of prevention is worth a pound of cure.
For more information on your sales and use tax return, visit 6 (Texas) Sales Tax Return Tips. The data is Texas-specific but some data is universal.
For an online class for an explanation of how to complete your Texas sales and use tax return, visit Understanding Your Texas Sales and Use Tax Return.
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