In my last blog, I discussed the opportunity CPA firms have to use sales and use tax issues as a way to cpa-1add value to their clients and further cement the relationships and related revenue stream. As promised, this blog provides the following action items for identifying sales and use tax risk with your client:

  1. Compare the state income tax return filings to the state sales tax filings. If your client is filing an income tax return in a state but is not filing a sales tax return, they may have an issue.   Generally, it is more difficult to establish nexus for state income tax purposes than sales tax. Consequently, if your client is filing income tax returns in a particular state, it is very likely they also have nexus for sales tax purposes. Once you have the states identified, determine if any of the sales in those states may be subject to sales and use tax. I recommend paying the most attention to states where the sales factor for income tax apportionment purposes is material relative to total sales.
  2. Review the sales tax payable account. I have found that the sales tax payable account is the most neglected balance sheet liability in the general ledger; most of my clients over the years never reconciled this account. Consequently, ask your client to provide you an account reconciliation that shows the liability by state or tax return. If you see large balances due to any particular state, there may be a potential risk point for failure to file and pay.   If your client does not have a sales tax payable account but sells tangible personal property or software, you should ask them how they account for sales tax on these sales. This simple question could uncover the client’s complete lack of knowledge about their sales tax responsibilities.
  3. Review a sample of invoices paid for fixed assets and supplies to ensure applicable sales tax was included in the invoice and paid to the vendors. Your client is responsible for any use tax on taxable property and services not otherwise paid in the form of sales tax to vendors. This is one of the most common sources of assessment and liability for state sales and use tax auditors, so identifying this liability early can save your client penalty and interest charges.

You can be a hero for your clients by identifying and mitigating any risk associated with their sales and use tax. I hope these action items help you help them!

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Robert Dumas

Written by Robert Dumas