Pitfalls of Sales Tax Compliance: Cash and G/L Management

As your business begins selling into more states, your sales tax obligations grow. That might sound simple, but sales tax compliance can quickly become a risk area if you're not careful, especially when it comes to managing cash and your general ledger (G/L).

In a previous post, we covered how your billing system and tax calendar are essential for collecting and remitting sales tax on time. But what about managing the cash needed to cover those tax liabilities and keeping your financial records aligned?

Let’s take a closer look at recordkeeping, reconciliation, and some common accounting mistakes businesses make with sales tax compliance.

Recordkeeping and Reconciliation

Your general ledger is a critical tool to ensure you're capturing all the sales tax you collect and remit, and to make sure you receive any credits and vendor discounts owed to you.

Sales tax collected from customers should appear on your balance sheet as an “approved liability.” The key here is monitoring that liability so you're not holding tax funds that should be remitted to states or local jurisdictions.

Surprisingly, many businesses never reconcile their sales tax payable accounts. That means they may be carrying tax liabilities that no longer belong on their books—opening the door to audits, penalties, or payment errors.

You should also review your billing system outputs and compare them to the amounts accrued in your G/L. Reconcile any differences and, just as importantly, determine which jurisdictions those liabilities apply to.

Lastly, consider this: Who owns your sales tax process internally? Is it accounting, IT, treasury? Assigning accountability is vital to ensure reconciliation gets done accurately and consistently.

Common G/L-Related Errors

We frequently see general ledger mistakes that can derail a company’s sales tax compliance. Here are some of the most common:

• ACH payment blocks: Most jurisdictions require electronic payments via ACH debits. However, your accounts might have security blocks that prevent states from debiting your account. Make sure every jurisdiction you owe tax to is properly cleared to withdraw funds.

• Use tax obligations: Use tax—paid when a seller doesn’t collect sales tax—must still be recorded and paid by the buyer. If your business buys large-ticket items or materials without paying sales tax, you may owe use tax. These liabilities must appear in your G/L and be part of your overall compliance process.

• Incorrect tax rate adjustments and vendor discounts: Changes in sales tax rates may not be reflected in your G/L. Additionally, small-percentage vendor discounts (for early payment or prompt filing) are often recorded incorrectly, leading to misstatements in your books.

What’s Next?

In upcoming blog posts, we’ll explore more pitfalls of sales tax compliance, including issues around return submission and oversight gaps that can cost your business time and money.

Want to dive deeper now? Watch our on-demand webinar:
Don’t Test Your Luck: The Pitfalls of Sales Tax Compliance.

Stay Ahead of Sales Tax Risks

TaxConnex helps businesses stay compliant with evolving state and local sales tax regulations. If you’re unsure about your G/L practices or how to manage sales tax reconciliation effectively, Get in touch to see how we can help you eliminate the burden of sales tax.