Clear invoices and contracts routinely save people money when dealing with clients and when they (the seller) are audited. Sometimes it seems as if we live in a world where ambiguity is valued. People think if they are not clear, they have more choices and opportunity to get what they want or need. In the context of sales and use tax, some people are not clear because they do not understand sales and use tax rules. While ambiguity may be useful in some situations, it is NOT useful when you are dealing with sales and use tax.
Clear invoices and contracts tell the story– Transactions are either taxable or nontaxable
Sales fall into two categories: taxable transactions and non-taxable transactions. Clear invoices and contracts make sales and use tax consequences clear. If you are selling cakes, put that on the invoice. If you are charging a fee for delivery, have it on the invoice. The taxability treatment may depend on whether or not you separately state charges, but you still need to have invoices that state what you are selling, who you are selling it to, if sales tax is charged and where items are being shipped. You want your client, staff, and auditors to be able to review invoices and contracts and have a clear understanding of the transaction.
The same thing applies to services. If you are performing services, make it clear what type of service you are performing. You can’t address the sales tax consequences effectively if it is not clear what service is being performed. In addition, it is imperative that it is clear where the services are being performed or used.
Clear invoices and contracts make compliance easy – Your sales team, accounting department, and potential auditor need to know the correct tax treatment
How can you and your sales team correctly plan the profit margin if sales and use tax is not clearly understood and addressed? How can your accounting department know the correct sales and use tax treatment for a specific job if they don’t fully understand the transaction? How will an auditor discern taxability if it is not indicated by a review of clear invoices, contracts, etc.? Clear invoices and contracts are imperative if you or your client claims an exemption or exclusion as it relates to a transaction.
It is typical to see ambiguity in construction contracts. If the project is a new construction project, let your accounting department know. In Texas, they also need to know what type of contract you have with the owner to determine if sales or use tax should be paid or accrued on incorporated materials, labor, etc. If the project is for a tax exempt entity, the accounting department needs to know. Not only does that affect their invoicing, it affects the sales or use tax the contractor pays, as well as what documentation needs to be on file.
Your documentation must make it clear exactly what you are selling, who you are selling it to, when you sold it, and support any tax-free sales. Make sure that your sales tax returns clearly reflect the collection and remittance of the correct levels of sales and use tax. Keep that documentation for the statute of limitations.
Clear invoices flow from clear contracts – “Standard” industry contracts don’t work if they do not function as a clear, easy-to-understand reflection of the transaction and the law
Don’t think that standard industry contracts address your sales tax issues. Again, the use of standard documents that do not constitute clear invoices or contracts is seen in the context of construction. There are standard industry contracts that some contractors consistently use, but those contracts do not specifically address sales tax. You need to know your responsibilities in the jurisdictions in which you operate and make sure all documents demonstrate compliance with those laws.
A contract stating that the contractor is responsible for the correct tax treatment of a project may work if you and the contractor have a legal dispute. It will not work, however, if you get audited. The taxing authority is not a party to the contract between the contractor and owner. Typically, the state taxing authority may pursue underpaid sales or use taxes from either the purchaser or the seller.
Clear invoices and contracts – Requirements for good compliance, documentation of that compliance, and the occurrence of low-stress audits
The last thing you want when an audit occurs is for an auditor to have questions. Your contracts, invoices, etc. should tell the story for you. Your staff must use clear invoices and contracts to paint a picture that they understood and fully complied with applicable sales and use tax laws. Remember, ambiguity is not your friend when dealing with sales and use tax compliance. Make what you are doing clear to support the outcome that (hopefully) you planned.
For more information on the importance of clear invoices and contracts, visit Clear and Concise Invoices–The Stars of an Audit.
For access to an online class that explains how data is reported on a Texas sales and use tax return, visit Understanding Your Texas Sales and Use Tax Return.
For a private consultation, schedule a call with us.