Pitfalls of sales tax compliance: cash and G/L management

As your business starts to sell into more states, you’re likely going to get more sales tax obligations. That may sound straightforward, but many aspects of your compliance process can go wrong (on your end, too, which can make for a nasty liability for your company).

Previously, we looked at the importance of your billing system and calendar in making sure you stay compliant with sales tax collection from customers and remittance to tax jurisdictions. What about maintaining and reconciling the cash to cover your sales tax liabilities?

Recordkeeping and reconciliation

Your G/L is a key tool point to make sure you’re capturing all sales tax that you’re remitting and that you get the credits and adjustments you have coming, such as vendors’ discounts.

Sales tax that you’ve collected from your customers should be recorded on your balance sheet as an “approved liability.” Your big task is to monitor that liability to make sure you’re not holding tax money that you’ve collected but that in fact belongs to the states or other tax jurisdictions. Believe it or not, many of our clients never reconcile their sales tax-payable account and so don’t know what tax liabilities are in their liabilities account that shouldn’t be there.

Examine what’s coming out of your billing system, too, and compare it to what you’re accruing on your general ledger, reconciling the difference – and, just as important, making sure you know what elements of your liabilities are potentially payable to what tax jurisdictions.

Also, who in your company owns the process of your sales tax issues? Your accounting department? Tech? Treasury? Reconciling assets for sales tax liabilities must be in the hands of accountable, specific personnel.

Other common errors

We see many G/L-related slip-ups with clients. Among them:

• Most states and jurisdictions offer the convenience to pay your sales taxes electronically via automated clearing house (ACH) debits. (In fact, paper checks aren’t even a free option anymore in some states.) Convenient yes, but this can require attention on your part: ACH debit security blocks might be inadvertently active on some of your accounts. Make sure jurisdictions where you have sales tax obligations are cleared to make debits – and can get paid.
• Use tax, a complementary or compensating tax to sales tax, must be paid by the buyer in cases where the seller does not collect sales tax. As a retailer, you have responsibility to pay use tax for large-ticket materials and equipment you use if you didn’t pay sales tax on these items. Use tax liabilities must be in your general ledger and integrated into your whole compliance process.
• Tax adjustments such as changed rates are not considered in the G/L, and vendors’ discounts (small-percentage tax breaks of the sales tax that you collected and remitted to the state) are recorded incorrectly.

In upcoming blogs, we’ll look at additional potential pitfalls of sales tax compliance such as the submission of returns and inadequate oversight.

(Learn more on our webinar “Don’t Test Your Luck: The Pitfalls of Sales Tax Compliance.”)

TaxConnex can help keep your business on top of your sales tax obligations and ensure you remain compliance. Get in touch to learn how!