A business owner needs to collect and keep track of sales taxes. Sales tax filing is the most important duty of every merchant. The state makes it mandatory for every merchant to collect sales tax and remit it to the government when due. You can suffer penalties and fines if you fail to do so.
Sales tax forms a significant part of the budget. The government does sales tax audit in order to ensure that businesses are properly collecting and paying their fair share of taxes. The auditors are people who have years of collective knowledge and experience. They know every trick of the book so it’s impossible to fool them.
Business owners want to avoid tax audits since it is quite painful to present all the books and records, especially for busy owners. The auditing process is very time-consuming.
But you need to have proper knowledge regarding the process of taxation. You’re charged with penalty fees by the government if you fail to submit sales tax on time or if audit reveals some kind of discrepancies in your taxing system.
Sometimes the imposed penalties are so high that small businesses are forced to close their business.
Sales tax act formulates the principles for determining the sales tax. The best way to deal with these audits is that you know the rules. Adopt methods that accurately records sales and calculates taxes. Always try to maintain updated and complete books of records.
Accurate record keeping
Follow the basic best practices in order to get a clean chit during sales tax audit. First and foremost important is to maintain accurate books and records. Auditors ask for the records of sale and bank statements. Records of sale comprises of the register tapes or access to sales data in the cloud (if you use a POS system).
Say, you own a restaurant. In your case, the auditor will ask for guest checks and access to dashboards (if you use third-party apps such as Grubhub). If you are a retailer and you have an online store along with a brick and mortar location. The auditor will ask for access to your sales dashboard to compare revenue and bank deposits. This is done to check if sales records show the same amount as the bank deposits.
You can face audits at any point of time so you should keep sales and bank records for several years. They can also do an in-depth enquiry after matching your revenue with deposits.
You need to avoid some mistakes so that you do not invite an audit such as
- Pay sales tax on time– if you always pay the taxes late, you are likely to attract auditing. Always pay your sales tax on time.
- Consider tax-exempt sales– a sale to a non-profit organization (sometimes referred to by their IRS classification of 501(c) (3)) is a tax-exempt sale like sales to a religious or school group or sports club. The organizations that say they are tax-exempt should provide a Tax Exempt Certificate to not charge them sales tax.
There are some sales that are not subjected to any sales tax because they fall under an exemption such as when selling for resale. In such cases, the buyer must provide the seller with a Resale Certificate. Get the certificate and attach it to your invoice or sales receipt and keep it on file. If you don’t charge them sales tax and don’t have a certificate and receipt on file for the group, you will have to pay the sales tax out of your own pocket.
- Use of third-party apps like Grubhub, Ubereats and Doordash can be very costly if you fail to manage them well. They can recreate additional streams of revenue which are in most cases outside the POS. The laws around these apps are undergoing changes rapidly.
- Manager’s Comp i.e. when you give something on a complimentary basis- you pay the use tax on the items that are offered for free. So the restaurant is responsible for the use tax even if the manager pays for the staff meals. If the owner himself comes to the restaurant and dines, the meal is comped.
They pay the use tax or mention it as personal income. Report all taxes on manager’s comp, else the owner will have to pay the out of his own pocket.