Business owners often make mistakes when it comes to sales tax calculations and filings which can result in penalties and interest. Today I’m going to discuss some of the typical errors so you hopefully don’t make any of them in your business.
The first thing to remember is that sales should be considered taxable unless there is a specific exemption. Any exemption you claim must be supported by documentation (for instance, proof a business is purchasing for resale by collecting their resale certificate). Sometimes an entrepreneur assumes their sales are not taxable because they are selling food, or they provide a service, but in the event of an audit, the taxpayer will be required to provide the supporting documentation for examination. It is imperative you look up the regulations for your industry to find out if there truly is an exemption.
Another mistake is to have a discrepancy between recorded and reported sales. This could be due to improper posting of transactions in your accounting file (for instance not properly recording allowable bad debt transactions, returned taxable merchandise or tax paid purchases resold prior to use.) It could also be due to a poor accounting process (postponing the accounting and estimating sales when the return is due). An auditor will examine your paperwork/accounting file and will need to understand why the figures are different. If the difference is not for the allowable reasons mentioned, you will most likely be charged the underpaid tax plus penalties.
A third mistake is using the billing address to determine tax instead of using the shipping address. This becomes a problem when the seller is shipping to a location in state, but the billed client is out of state and therefore not being charged tax on the sale. Even if the purchaser is not in state, if the product is delivered to another location in the same state (for instance a gift shipped to a friend or family member), it is subject to tax. You must not determine tax based on the billing address. Use the shipping address instead.
Hopefully you are not making any of these mistakes, but if you are, make immediate adjustments to begin to properly record and report your sales and tax due. If this is a task where you would like assistance, contact us today at 310-534-5577. We’re here to help!
