Legal Corner: Know the law on sales tax
What exactly is an audit? It’s not fun to think about, but it’s necessary information to know. An audit is defined as an independent examination of books, accounts, documents and vouchers of an organization to determine whether the organization has presented a fair and true representation of what the financial and non-financial status of the organization. In short, an audit is conducted to see if you are telling the financial truth regarding your business bookkeeping.
There are various types of tax audits: income tax audits, payroll tax audits and sales tax audits. Since retailers are in the business of sales, let’s focus on sales tax audits. As you may know, the U.S. Supreme Court recently ruled on when online retailers must charge sales tax. Before the ruling, for the most part, online retailers did not have to collect sales tax on online purchases unless they had a place of business in the state where the purchase was made. The new ruling states they are susceptible to sales tax laws where the purchase was made, regardless if they have a physical presence or not.
There are several tips that help you avoid being audited or at the very least being prepared in the event that you are audited. Knowing these rules and implementing these tips will greatly minimize any issues you may experience regarding sales tax. KEEP GOOD BOOKKEEPING RECORDS
You would be amazed, but so many businesses do not keep good records. “It’s just more paper.” “It gets in the way.” These are excuses I have heard for not keeping good records. However, in an audit situation, it is on you — the business owner — to either produce proof, as in paperwork or a receipt, that you did collect the appropriate taxes or to prove that you were not required to collect. If you cannot, you will be charged a penalty.
KNOW WHICH STATES YOU WILL CONDUCT BUSINESS
The law requires that you collect sales tax where you have a “sufficient physical presence.” So, for example, if you have a brick-and-mortar in Georgia, then you must charge sales tax on all purchases that are made when customers walk in your store.
OBTAIN PROPER LICENSES
Make sure you have proper business licenses and sale tax licenses. You must do this in order to collect sales tax and then report it to the appropriate state collection entity.
KNOW THE LOCAL TAX RATES
Sales tax rates vary depending on what state you are in and what county you are located. The purpose of determining this information is so that you do not over or under collect taxes.
WHAT ARE THE PRODUCT TAXABILITY RULES?
Most products are categorized as tangible personal property and taxed accordingly. However, there are other products that do not fit into this category, so it is incumbent upon you to do your due diligence and find out if what you are selling falls into another category.
THE DIFFERENCE BETWEEN ORIGIN- AND DESTINATION-BASED RULES
In a destination state, if the purchaser takes possession in the store, then the retailer should charge its sales tax. If the purchaser takes possession in another state, then the retailer must charge the sales tax of the state that the purchaser takes possession of the goods. Most states are destination states. Origin states require retailers to charge their state’s sales tax on all goods, whether possession happens in the store or elsewhere.
MAINTAIN EXEMPTION CERTIFICATES
There are specific situations where collecting sales taxes is not necessary and inappropriate. Two common examples are when you wholesale merchandise to other retailers for resale and when selling to nonprofit organizations. In these cases, you should need to get a copy of their tax-exempt certificate or resale certificate and keep it on file.
ARE YOU CHARGING THE PROPER SALES TAX?
Knowing the difference between interstate sales tax and intrastate sales tax is important. Interstate sales tax is the sales tax that is charged to another person in another state because there is a nexus or connection between your business and the state the customer is located. Intrastate sales tax is sales tax collected within the state where your business is located. So you must be aware of the rules for both.
RED FLAGS THAT TRIGGER AUDITS
Factors that may lead to an audit include the following:
• Volume of sales tax.
• Late sales tax filings, so be sure to file on time.
• A large number of tax-exempt transactions.
• Nexus with another state.
• Sole proprietorships are more likely to be audited than LLCs or corporations. The reason being that the vast majority of sole proprietorships prepare their own taxes, leading to errors because a certified accountant did not do the work.
The most important thing to remember is that ignorance is not a defense. You are a business owner; you are held to a higher standard in the sense that you are supposed to be researching and educating yourself on how to take care of your business. If you are not sure where to begin or how to take care of your finances, then seek advice of an accountant. Yes, it will cost some money, but it is so worth it. Accountants know the numbers and the rules with regard to when and how taxes should be collected.
Your investment will be well spent.
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