When most business owners think of sales and use tax compliance and audits, they focus on the correct taxability treatment of their sales. They are surprised to learn that auditors review two areas: sales and purchases. This article focuses on the review of sales invoices. If client are invoiced incorrectly, the Comptroller will seek the deficiency from the party being audited. However, the deficiency is the liability of the purchaser and the seller may seek compensation from the purchaser for any assessment of tax.
Clear, Concise & Easy to Understand Sales Invoices
One of thing business owners can do to make their lives easier to have clear and concise sales invoices. No one wants to guess what items are being sold, where the item was shipped, what service is being performed or where that service was performed.
Make sure invoices completely and accurately (1) describe what products and/or services are being purchased and (2) memorialize the transaction in a manner that dictates the tax treatment planned by the buyer and seller. It is also important to note where a service was performed and where an item was shipped. All of these things can impact the correct taxability treatment, including which tax rate is applicable. Sales invoices should support the tax treatment of the transaction.
Common Sales Invoice Errors Relating to Taxable Services
There is absolutely nothing worse than a taxpayer stating that they provided a nontaxable service and noting that all the invoices clearly name the taxable component of the service with no mention of the nontaxable components. This is problematic for several reasons:
On its face, the transaction is taxable. The presumption is that the invoice correctly states the product and/or service being purchased in real time. It is hard to convince an auditor that the invoice is incorrect and the correction of the invoice means that the transaction is no longer taxable. The presumption may be overcome in some instances but it may be difficult. Can you imagine if taxpayers could restate invoices during an audit and change transactions from taxable to nontaxable with little corroborating proof?
Even if the transaction is not taxable and it can be proven, sometimes quantifying the taxable component of a nontaxable transaction results in the taxation of the quantified taxable portion of the transaction.
Again, it is best to document transactions in the sales invoices, and customer documents, that support the tax treatment of the transaction. Secure the appropriate resale or exemption certificate. For more information visit, Easy Mistake! Resale vs. Exemption Certificates.
Common Sales Invoice Errors Relating to Goods
Incomplete invoices that do not describe the items being sold, whether the items were picked up or shipped to a location or do not specify where the item was shipped, can also cause a nightmare in an audit situation. Taxable and nontaxable items are routinely invoiced together. If the item description isn’t clear how can an auditor know what was sold, let alone if you taxed it correctly?
The same is true relating to “ship to” information. Whether an item is shipped out of state, exported to another country, picked up at your location or delivered in your truck can affect which tax rate you charge and the documentation that you need to obtain from your customer. A blank “ship to” field on your invoice isn’t helpful. It is also not a good idea to assume the “Bill To” address used on sales invoices will dictate the taxability of the good or service.
Make Your Life Easy-Review Both Purchase & Sales Invoices
It is imperative that purchase and sales invoices (and all other documentation) support the tax treatment of the transaction. If an auditor states that a transaction is taxable due to inaccurate information on an invoice, it costs the taxpayer unnecessarily to prove the auditor incorrect. Audit findings are presumed to be correct. Taxpayers typically pay internal staff and third parties when proving audit findings are not accurate. It is a money drain that can be avoided by accurately and consistently documenting transactions.
Take the time to review contract terms, pay applications, invoices and all other documentation of the transaction to ensure proper taxation. It is a good practice to have large dollar items and large volumes of small dollar transactions reviewed. This is true whether you are the seller or the purchaser. Interim reviews or project reviews are imperative even if your accounting team is confident about applicable sales and use tax. People make mistakes. It costs you less money if you (not an auditor) finds mistakes and you correct them quickly!
For access to an online class that explains how to complete a Texas sales and use tax return, visit Understanding Your Texas Sales and Use Tax Return.
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