As states such as Pennsylvania struggle to pass budgets that limit tax increases and still meet the needs of a growing government, many tax professionals believe there will be a substantial increase in the number of sales and use tax audits in the year ahead to balance budget shortages.
The beginning of a new year is often a good time to review sales and use tax practices. Below are a few thoughts to consider in the new year.
Proper Registration - It important to make sure your business is properly registered in all taxing jurisdictions as required by law. Nothing is more frightening than an audit letter from a tax jurisdiction where your business is not currently registered and collecting tax. Businesses should have consistent ongoing communication with their tax department so that they have an accurate understanding of where and how the company does business. Specifically, the focus should be on the activities that the company engages in and the relationships it has with other entities to build and maintain its markets in various states.
Laws regarding registration requirements or nexus can and frequently do change. An annual review of company registrations and company activities can help ensure proper registration in applicable states and eliminate the surprise audit from a tax jurisdiction you were not anticipating.
Proper Documentation - In addition, it should be noted that most sales and use tax assessments result from lack of proper documentation rather than from misunderstanding or improper application of sales and use tax rules and regulations. If your business’ products and or services are subject to sales tax, an annual review of exemption certificates is essential.
Certificates for all exempt purchases should be on file and all should be fully completed and list a valid exemption that is consistent with the customer’s business activities. All certificates should be signed and dated where appropriate.
If a certificate is missing, a replacement certificate should be requested from the customer. Customers with blanket certificates that are more than a few years old should be contacted for updated certificates. Old certificates should be retained for an additional few years or at least until the statute of limitations expires, as they may be needed in a future audit.
Document reviews should not be limited to exemption certificates but should also apply to purchase invoices. Use tax is often assessed on purchases that have missing invoices or where insufficient documentation is retained. Sometimes credit card and p-card purchase statements are retained instead of invoices. Unfortunately, these statements usually do not indicate whether or not sales tax was charged, so the auditor then assumes that it was not and will include it in the assessment, unless there is additional documentation showing that use tax was accrued and remitted on the purchase. Thus, companies should review purchase documentation to ensure tax was paid and is documented on all taxable purchases. If the invoice is missing or inadequate documentation was retained, the vendor should be contacted for additional copies of the related invoices at issue.
Finally, always remember that the best time to prepare for a sales and use tax audit is before you get the audit letter for the Department of Revenue or Taxation.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.