For unprepared businesses, a sales and use tax audit has the potential to be costly. Adjustments and the ensuing penalties and interest can quickly add up, jeopardizing a company’s financial health. Here are four simple steps you can take to mitigate your risk.
#1. Keep the exemption certificates you receive from your customers.
If you’re claiming some of your taxable sales as exempt, you must be able to present the exemption certificates you’ve received from your customers as proof. Although this is an incredibly important—and easy—action to take, many business owners neglect it. In most cases, this is because their employees didn’t ask for one, or because the certificates were simply misplaced.
If your business doesn’t have one already, institute a policy that requires employees to request exemption certificates before working with a new customer. Make sure exemption certificates are kept in an active file, not one that is liable to be purged.
#2. Include enough detail on your invoices.
Every single invoice should itemize each product and service billed to your customer. For the sale of a door, for instance, this might include the product (i.e., the door), delivery, and installation. Most important, be specific. One business ran into trouble because it didn’t provide details on invoices for moving existing product to a new location and installing it. The activities weren’t taxable, but because the descriptions on the invoices were vague, the auditor didn’t have the requisite proof.
#3. Be aware of local area taxes.
In the U.S., there are more than 7,500 taxing jurisdictions. Here in Minnesota, these include state tax, a handful of local city and county taxes, transit taxes, lodging taxes, and even entertainment taxes, to name a few. Needless to say, it can be tough to keep up with all of these. But if you fail to account for one, expect to see penalties headed your way.
To determine which taxes you may be liable for, review your business practices. Where are you performing services? Where is the actual sale taking place? Are your customers picking up product, or are you shipping it? You may not think you are doing business in, say, St. Louis Park, but if your employees are using company trucks to deliver products there three times a week, you may want to think again.
#4. Involve your tax professionals.
If you’ve been notified of a sales and use tax audit, contact your tax professional right away, even if he or she won’t be involved in the audit. This person can help you determine potential liabilities as well as prepare. Your accountant can also guide you in determining best practices for obtaining and filing exemption certificates and preparing invoices, and can keep you up to speed on local taxes. Regardless of your sales and use tax situation, checking these steps off your list can go a long way toward mitigating your risk.