Sales Tax Compliance Processes - Importance of Documenting

Sales tax compliance is riddled with risk. Failure to comply with the applicable sales tax rules can have a devastating effect on a business, but they’re often overlooked because they’re considered “pass-through” as the business is responsible for collecting the applicable taxes which pass through the business and are subsequently turned over or paid to the states. While these pass-through taxes are not meant to create a financial burden on a business, failure to comply can create significant risk, and managing the obligations can be a burden to the team that has to manage them.

There are thousands of taxing jurisdictions – each seemingly with unique sales tax rates and interpretations of what’s taxable and not taxable. A solid tax compliance process helps minimize this external risk.  However, what happens when the risk originates internally in the form of turnover or some other internal disruption?

The best way to manage risk associated with potential disruptions within your sales tax department is to maintain thorough documentation of your department’s tax compliance process.  Process documentation helps to reduce confusion related to process responsibility among staff members, can serve as training material for new staff, and can help non-department members understand department responsibilities. 

The following areas at a minimum should be included in your documentation:

Data Management:  Include a list of source reports for monthly sales & use taxes, what systems the reports are generated from, who is responsible for generating the reports, where the reports are stored, and when they are available each month.  Also, include a description of what information from each report is used and how.
Tax Calendar: Maintain a listing of all tax returns that are filed for each company, who is responsible for filing the returns, account IDs, filing frequencies, due dates, login credentials, payment methods, and reporting methods.
Return Specific Instructions:  Document all return-specific requirements such as manual adjustments, prepayment calculation methods, and credit reporting.

Document Management: List all documentation and backup work papers that are stored for each return and where they are located.
Reconciliation Procedures: List all G/L accounts that are impacted by the compliance process and the specific reconciliation procedures for each account.
Exemption Certificates: Maintaining current, valid exemption certificates (if this is part of your process) is critical in managing your overall sales tax risk. Ensure you have a process to gather, validate and store your exemption certificates so they can be found in case of an audit.

This is a lot to add to an already over-burdened accounting team but by outsourcing the sales and use tax function you can save time and risk. Just ensure the provider you pick doesn’t leave the heavy lifting on you. Not all providers will manage this level of documentation for you, if at all.

However you choose to manage it, it is pertinent to ensure thorough documentation of your sales tax compliance processes so that when or if you are audited or experience some sort of employee transition or internal disruption you will not have to go into panic mode or start from scratch. If you’re currently facing an internal disruption and would like to turn to outsourcing your current obligations, get in touch. With TaxConnex, sales tax is all on us, including the proper documentation of your tax compliance process.