The Marriage of Sales Tax Compliance & Clear, Concise Invoices

by | Mar 21, 2022 | Audits, General Business, Stephanie's Wisdom | 0 comments

Sales tax compliance is a complex thing. Knowing whether you must register in a jurisdiction (i.e., do you have nexus), whether what you sell is taxable, what tax rate you should charge, the applicable sales tax exemptions, etc. can be a lot to digest when you are starting your business. One thing that all business owners can do to make their lives easier is have clear and concise invoices.

Two Types of Sales

Taxing authorities usually categorize sales in two ways: sales of tangible personal property and sales of services. Whichever category your sales fall into, your invoices need to make it clear what is going on. If you are selling cakes, put that on the invoice. If you are charging a fee for delivery, have it on the invoice. The taxability treatment may depend on whether you separately state charges, but you still need to have invoices that state what you are selling, who you are selling it to, if sales tax is charged and where items are being shipped. The same thing applies to taxable services. For example, if you are performing construction services, make it clear what type of service you are performing.

Why Clear & Concise Invoices Are Important

You can’t address the sales tax consequences effectively if it is not clear what service is being performed. Plus, for those jurisdictions where new construction is treated differently from repair or remodeling, it is always best that the contract spells out what type of project you are working on. How can your accounting department know the correct sales and use tax treatment for a specific job if they don’t know what type of project it is?

If the project is a new construction project, let your accounting department know. In Texas, they also need to know what type of contract you have with the owner to determine if sales or use tax should be paid or accrued on incorporated materials. If the project is for a tax-exempt entity, the accounting department needs to know. Not only does that affect their invoicing, but it also affects the sales or use tax the contractor pays, as well as what documentation needs to be on file.

Contracts & Sales Tax Compliance

Also, don’t think that standard industry contracts address your sales tax issues. There are standard industry contracts that are commonly used in miscellaneous industries. Those contracts normally do not specifically address sales tax compliance issues. Businessowners need to understand their sales and use tax responsibilities as it relates to the sales tax you charge your customer as well as the sales and use tax you pay on purchases.

Contract language stating that either the seller/ service provider or customer is responsible for remitting the appropriate sales or use tax may work if you and the contractor have a legal dispute. It will not work, however, if you get audited. Even if you have a provision like I just described, if your company is audited and the vendor failed to charge the appropriate sales tax, the auditor will assess it on your audit. Basically, it is all about who the taxing authority audits first. Keep that in mind when you are signing those contracts. A catch-all contract will not always work.

Key Takeaways

The point is the last thing you want is for an auditor to have questions. Your contracts, invoices, workpapers, etc. should tell the story for you. For you to understand your sales and use tax responsibilities, you must be clear about what services you are providing, what items you are selling and what documentation you need to have on file for tax free sales.

Ambiguity is not your friend. While that may be okay some of the time in your everyday life, it isn’t okay when you are dealing with sales tax. Your documentation must make it clear exactly what you are selling. That is why you must call a thing a thing.

 

Sales Tax and Bad Debt Write-Offs!

In our discussion, we are focusing on bad debts and how they affect the sales and use tax that you report to the taxing authority. We also discuss the importance of documenting which bad debts were written off and how important it is in an audit context.

advice about clients

Top 4 Red Flags About Bad Clients!

Over the course of my career I have regretted becoming engaged by select clients.  I thought it would  be good to share some of my experience dealing with difficult clients and the red flags that can help other small businesses identify them.   

Accounting Software Upgrades & Reluctant Staff

The effectiveness of an accounting software upgrade is underminded if your accounting staff refuses to use it. You must manage your expectations and help your staff wrap their heads around the new technology in order to make the most of your oftentimes expensive upgrade.

Sales Tax Nexus- Am I Required to Collect Sales Tax?

A few years ago, the Wayfair case was everywhere. It changed the landscape regarding sales tax nexus and registration requirements for remote sellers all across the country. Let’s talk about what the case may mean for you and your business. For some people, it means very little. For other people, the world exploded.

sales tax audit

Things to Do After Receiving a Sales Tax Audit Notice!

Nothing can kill a sugar or caffeine buzz quicker than a sales tax audit notice, right?  Not so fast!  The worst thing you can do is panic or allow a sales and use tax audit notice to color your day.   You've got this!!...You do!  Take a deep breath and DO NOT PANIC! ...

Sales and Use Tax Audits- Don’t Forget the Credit Cards

When you first receive notification that your business is going to audited for sales and use tax compliance, there are a number of areas of concern they may occur to you.  One thing that business owners routinely overlook is company credit cards and how they can...

Sales Tax Audits- Can the Auditor Do That?

Once you involved in an audit, you must understand that the taxing authority has broad powers as it relates to what documents they can request. If a state tax auditor requests data, you should produce it. If you don’t, there are consequences that are very unpleasant. Find out how much power the auditor has and how to navigate the process.

The Sales Tax Audit is Over! Now What?

Congratulations! You have survived your sales tax audit. While you can breathe a sigh of relief, don’t think that the tax authority is through with you because the audit is over.

Depending on the sales tax audit results, (i.e how much money your company owed in sales and use tax), you may be audited again.

Why Use a Sales Tax Consultant? Not All CPAs Address Sales Tax!

Sales and use tax is a specialized niche area. While your book keeper or CPA may be helpful in myriads of other ways, sales and use tax compliance is not their speciality. You may need to consider another resource, like a sales tax consultant.

Top 5 Sales Tax Audit Gotchas!

Here we discuss about five things you can do to make your audit go smoother. Four of the five tips are things to do when you set up your accounting practices and systems.

Top 5 Sales Tax Audit Documentation Mistakes!

The key to all audits is documentation. You must prove what you do, that you collected the correct amount of sales tax, all sales tax collected was remitted, etc.

Texas Taxes for the Construction Industry– September 9, 2022

Texas Taxes for the Construction Industry– September 9, 2022

This class is for Texas contractors who want to know when to collect sales tax from customers and when to pay tax on purchases.
Texas Taxes for the Construction Industry– November 4, 2022

Texas Taxes for the Construction Industry– November 4, 2022

This class is for Texas contractors who want to know when to collect sales tax from customers and when to pay tax on purchases.

0 Comments

Submit a Comment

Your email address will not be published.

Share This