Friday, October 26, 2012

Tips for a Painless Sales Tax Audit

I have just been through a Wisconsin Sales & Use Tax Audit with one of my clients and it left me with some tips for all of my small business client.

1. One of the first things you need to do when starting a business is to verify whether your sales are subject to sales tax or not. If none of your sales are subject to sales tax or all of your sales are subject to sales tax, then you do not have anything special to do. If some of your sales are exempt from sales tax, then you need to be sure that you have Exemption Certificates on hand. There is a penalty for claiming the exemption without having the Exemption Certificate from the customer. I recommend filing them alphabetically in a 3-ring binder and if you have the technology, also scanning them and attaching them to your customer record in your Accounting or CRM program.

2. The main area that is being audited lately is the Use Tax as more people are purchasing over the internet. An audit normally consists of an alphabetical sample over the past 4 years. For this reason, I recommend that you file all vendor invoices first by year, and secondly by Vendor in alphabetical order. If you have vendors that you purchase from regularly, they should have their own file. All other vendors can be filed under the first letter of their business name (a generic F file, for example). A normal accounts payable practice is to attach a copy of the check stub to the vendor bill when paid or to write the payment date, amount, and reference number, and account paid out of on the vendor bill if it is scheduled for electronic payment. Be sure that you obtain a vendor bill or receipt for all purchases since it will be assumed that you did not pay sales tax if you cannot produce a receipt. Filing by this method allows you to easily look up any inquiries for internal purposes and also allows you to easily pull the required sample (i.e., 2008 A-F vendors). If you are paperless, this same filing system is appropriate on your computer.

Vendor bills paid with a credit card cause an issue. Some people prefer to attach all invoices to the appropriate credit card when reconciling the credit card and then file the entire bundle under the letter for the credit card company. I prefer to mark on the vendor bills that they were paid by a particular credit card and then file them under the appropriate vendor file. This makes it easier to find a particular invoice as you can look directly in the vendor file and do not have to guess as to what month the purchase happened on the credit card.

3. The purchases that you need to treat with special care are all purchases for which you did not pay sales tax. This means that as each bill is paid, you need to check to see if you paid sales tax or not. If you did not, you need to verify that it falls within the law of items exempt from usage tax. If it does not, then you need to set those bills aside in a "usage tax" file and calculate the usage tax on them when you file your Sales & Use Tax Filing. In particular beware of the following:
  • Internet purchases from out of state companies
  • Purchases from companies that are normally exempt from tax due to manufacturing or resale but are being used for a purpose different than the reason for the exemption 
  • Fixed Asset purchases. Each one of these was looked at separately (no sample was taken).
We have several clients who have so few vendor bills that they file first by the year, and then by a topic (i.e., insurance, purchases, etc), normally in an expandable file folder system. If your vendor bills are small enough to file using this method, that is fine as you will likely have all of your bills looked at instead of a sample anyway.

If a business files timely Wisconsin Sales & Use Tax returns, the records must be retained a minimum of the 4 years open to audit (7-10 is often recommended for income tax purposes anyway). If Sales & Use Tax returns were not filed, then records should be kept for a minimum of 10 years. Exemption certificates marked "Continuous" should never be destroyed.

In Wisconsin there are pen the sample is extrapolated over the 4 years of the audit and interest is calculated at 12% annually on errors. In addition steep penalties can be assessed for failure to produce the documents or failure to use them correctly. If you have any questions related to what is subject to sales or use tax, be sure to ask your accountant  for clarification.


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