How to Maintain Compliance Documentation for Sales Tax Audits

Maintaining sales tax compliance documentation is crucial for businesses to ensure smooth and successful audits. Proper documentation allows auditors to interpret and verify your financial transactions accurately. Unfortunately, many businesses find themselves unprepared when faced with an audit, lacking the necessary documentation. This can lead to auditors assuming transactions are taxable, or making historical projections or arbitrary assessments of taxable sales. 

To avoid such scenarios, here are the types of documentation typically required by auditors to conduct a thorough review:

1. Sales Tax Accruals

Ensure that sales tax is stated in your general ledger as a separate GL account number. This separation helps in clearly identifying and tracking sales tax amounts.

2. Invoices

Keep both sales and purchase invoices well-organized. These invoices provide detailed records of your transactions and are essential for verifying taxable and non-taxable sales.

3. Returns/Credits

Returns and credits should be clearly identified in your accounting system. Make sure these are appropriately invoiced to maintain accurate records.

4. Exemption Certificates

Maintain accurate and complete exemption certificates for each exempt customer. These certificates validate the tax-exempt status of certain sales and are vital during an audit.

5. Bad Debt

Most states allow a deduction for bad debts written off for Federal income tax purposes. Ensure these bad debts are clearly identified and documented in your accounting system.

6. Miscellaneous Adjustments

Any adjustments taken on your tax return should have supporting documentation. Most companies keep this documentation along with a copy of the filed return.

7. Consumer Use Tax Accruals

Consumer use tax accruals should be tied to specific purchase invoices. This ensures that the taxes on purchased goods used within the company are accurately accounted for.

8. Summary Reports

Maintain summary financial and tax reports that reconcile with the filed tax returns. These reports provide a comprehensive view of your financial activities and tax liabilities.

9. Returns

All audits start with a review of sales and use tax returns, but most auditors will also request income tax returns. Make sure that gross receipts reconcile between income tax and sales and use tax returns. 

Final Tips

• Organization is Key: Keep your sales tax compliance documentation well-organized and easily accessible. This not only helps during an audit but also improves your overall financial management. 

• Regular Updates: Regularly update your documentation to reflect the latest transactions and adjustments. This ensures that your records are always current and accurate. 

• Consider Outsourcing: If you're unsure about how to maintain compliance documentation, consider seeking help. They can provide guidance and ensure that your records meet all legal requirements. 

By following these guidelines, you can ensure that your business is well-prepared for any audit, minimizing the risk of unfavorable assessments and penalties. To learn more, download our latest eBook – How to Prepare Your Business for a Potential Audit.

TaxConnex can help you prepare and assist you in your sales tax audits and ensure you’re set in an already compliant sales tax process before the audit notice arrives. Contact us to learn about the latest developments in sales tax and what they mean to you and your company.