Sales tax returns and supporting documentation are the key to sales tax compliance. The first time people submit a sales tax return, most people wonder “did I do it right?” Let’s unpack this question.
Compliance issue 1: Did you provide the requested information on the return?
Sales tax returns have a few things in common. One key thing is the tax authority asks you to tell them key information. Don’t assume you know what is being asked. Taxing authorities define terms such as “total sales,” “taxable sales,” “taxable purchases,” etc. If you are unsure of what the terms mean, look it up or ask. Find out about the risk of inflating sales figures 4 Reasons Inflated Sales Figures Cost Money.
Compliance issue 2: Did you record and maintain how you calculated the numbers you reported?
When you are audited, the state tax authority knows what you reported as total sales, taxable sales, taxable purchases, etc. They don’t know how you calculated the numbers. That is the information that you must be able to produce upon request. Don’t rely on the information in your accounting system to stay the same. Accounting entries can change the numbers in your accounts. Print or save the information used to compile your return.
Compliance issue 3: Do you have the documents that show how you computed the figures in your sales tax returns for the statute of limitations?
The statute of limitations, absent a finding of fraud, is typically 3-4 years. It varies by jurisdiction. You must keep the necessary data on hand for the appropriate statute of limitations.
Compliance issue 4: Do you have documents that support any assertion that all sales are not taxable?
If there is a difference between total sales and taxable sales, you must be able to prove the exempt nature of sales that you did not not tax. Is the exemption in the Tax Code? Do you need to have properly completed exemption or resale certificates from your clients? If so, do you have them? Are the certificates stale? How often does the pertinent jurisdiction require that you secure a certificate? What is an acceptable certificate?
Compliance issue 5: Do you understand the taxability of the goods and/or services you sell and consume?
You must fully understand how the tax rules impact your business. That is your responsibility. You are not required to know all facets of the Tax Code, only those portions that relate to your sales and purchases.
Compliance issue 6: Do you understand taxable purchases?
Did you record how you calculated the amount reported and keep the related documentation? Taxable purchases involve paying the state tax authority directly when you purchase a taxable item or service for which the vendor did not collect the appropriate sales or use tax. DO NOT ADD TAX TO AN INVOICE and give the money to the vendor. You don’t know that the state received those funds. You may be required to pay the money to the state (again). It’s better to remit the tax yourself and keep the documentation.
Compliance issue 7: Did you collect and remit tax at the correct tax rate?
State and local taxing authorities have tax rate information readily available. Tax rates vary, sometimes wildly, by jurisdiction.
Compliance issue 8: Do you file timely?
Whether you are a monthly, quarterly, semi-annual, or yearly filer, make sure you file your return and remit related payments on time. Regardless of whether the taxing authority sends you a reminder, you are responsible for the state of your compliance.
If you need a starter class on preparing a Texas sales and use tax return, visit Understanding Your Texas Sales and Use Tax Return.
For related video content, visit YouTube Video Sales Tax Return Playlist
Our mission to provide a resource so business owners, accountants and bookkeepers can understand sales & use tax compliance. We know that sales and use tax laws are not the easiest to understand. Our focus is on empowering you with a framework and general understanding, so you know what questions to ask and where to go to get the information you need to stay on the right side of sales and use tax compliance.