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When Can Your Business Start Summer Cleaning?
Most professionals get to engage in “Spring Cleaning”, however, those going through tax season are not afforded that luxury, they must wait for Summer!
Keeping adequate records is of the utmost importance for a business, but how long should a business retain different types of records related to sales tax? As is often the answer in sales tax, it depends. Some types of records should be kept indefinitely, while other types of records should be retained according to the potential liability exposure should the records be deemed inadequate. The type of sales a business is making, as well as whether a business has a physical location or an online presence, will impact the level of difficulty associated with maintaining adequate sales tax records.
Record type should be considered when deciding how long to keep documentation. The goal of record keeping is to insulate your business from audit liability by ensuring your business has a defense wherein the evidence to support your case is clear. Minimum requirements vary for record keeping across jurisdictions, but below are a few guidelines for documentation with recommended record retention periods.
Sales Tax Returns
Depending on a company’s method of filing, accessing older sales tax returns can prove difficult or unnecessarily time consuming if copies of returns are not saved at the time of filing. It is good practice to have a central location where all filed returns can be saved as well as associated documentation such as filing and payment confirmations. Additionally, the data used to generate a sales tax return should be saved. This type of documentation should be stored indefinitely.
Having a well-maintained exemption certificate repository is crucial for business operations as it relates to invoicing, charging sales tax to the appropriate customers, and providing your company with a strong audit defense. Accessible records of validated exemption certificates should be kept indefinitely.
Purchase receipts and invoices
If a jurisdiction imposes an audit on your company, especially in a major area of operation such as a headquarters or a manufacturing plant, improper management of purchase receipts and invoices will likely have a steep cost. Companies must be able to demonstrate that sales tax was paid on non-exempt purchases. If sales tax was not paid at the time of a non-exempt purchase, companies are expected to have self-assessed use tax and remitted the use tax to the jurisdiction. An inability to produce an auditor requested document can allow for jurisdictions to deem a transaction taxable, even if it was for something nontaxable or tax was likely shown on the receipt. Without documentation there is no proof. Documenting the use of a sales-tax-free purchase is also important as you may need to prove the exempt use.
There are statutes that put limitations on how far back an audit can go and the limitations can vary. It is good practice to know the limitations in the jurisdictions in which your company is active and put a policy in place for this type of record retention.
Sales receipts and records
If a jurisdiction imposes an audit on your company, it is key to have sales records competently documented and stored. Records should indicate taxability and show sales tax where applicable. It is important that your company can demonstrate that not only was all tax collected remitted to the correct taxing jurisdiction, but also appropriate tax was collected. Sales records should be kept such that it is not challenging to tie the records back to the general ledger and other important documentation.
As with Purchase Receipts there are limitations on lookback periods, and it is good practice to put a well thought out record retention policy in place based on the risk of exposure in a jurisdiction.
What happens if sales tax records are not up to snuff?
Unfortunately, inadequate record keeping comes with a price tag attached. A lack of documentation can lead to much higher sales tax audit assessments as well as penalties and interest. A company may have decent record keeping but not know where all their documentation is located. Time spent searching is more time and effort expended on an audit instead of business operations. Additionally, a willful failure to keep required records and provide documentation can have more serious consequences.
The consequences of consistently poor retention of these types of documents can undoubtedly push a company to reevaluate their current systems and policies, or lack thereof, and lead to the implementation of new processes. The time, money, and energy spent on an overhaul of this nature can easily be avoided by ensuring good practices are implemented as early as possible and routinely reviewed for necessary adjustments.
Tips for the Taxpayer
The sales tax cycle never stops, and neither should your company’s vigilance when it comes to sales tax records and supporting documentation. There may be many steps to ensuring all proper documentation is stored and organized but dedicating a small amount of time each month to take those steps can make all difference. Sales tax issues can be complex, but record retention does not have to be. Some simple guidelines to follow to limit a company’s sales tax risk include, but are not limited to:
- Keeping sales tax data and filings organized and stored in a central location.
- Reviewing a collected exemption certificate for correctness prior to accepting it and then properly storing the certificate.
- Putting policies in place for purchase receipts and sales receipts that meet the requirements of applicable laws and regulations.
- As company decisions are made that may impact record retention, keep in mind your company bears the burden of proof when it comes time for a sales tax audit.
- Hiring tax professionals to ease the administrative burden and provide consulting expertise to limit risk and potential sales tax exposure.
How Can We Help?
Allyn’s tax team is staffed with seasoned tax professionals experienced in all aspects of Federal, multi-state and local tax compliance and consulting for large US and global corporations. We use that experience to your advantage.
Allyn files sales tax returns in every state with a sales tax in the US, and we often defend our work under audit. We have a notable track record of reducing sales and use tax audit liabilities in addition to gaining refunds for tax overpayments.
Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: email@example.com.
For More Information
If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News & Publications at www.allynintl.com.
Contributor: Christine Carlson
About Allyn International
Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance. Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China, Prague, Czech Republic, and Dubai, U.A.E. For more information, visit www.allynintl.com.