Stephanie Thomas is a certified public accountant (CPA) with expertise in state and local tax (SALT) issues. She wrote this guest post on why it’s important for you to keep a good record of your receipts.
Picture it! The time: Tomorrow. The place: Anywhere, USA. A taxpayer is being audited by a state taxing authority. Everything is in order except for one thing: the auditor wants you to prove that sales tax was paid when your employee bought emergency supplies from Sam’s. You look at him incredulously…everyone knows Sam’s charged tax!
The auditor calmly explains that audit procedure requires him to look at all invoices to be certain. He is going to expand the scope of the audit and charge your company sales tax on all credit card and debit card purchases for which you cannot produce a receipt.
Are you screaming yet? This is happening to someone right now. Don’t let it be you!
Company credit cards and prepaid debit cards can be a godsend in today’s world. They are an efficient tool that enables employees to make purchases on the company’s behalf worry-free. They allow corporations to track expenses and set spending limits at the click of a mouse. While these cards are great tools for your company— thank you Bento for Business!—all receipts and invoices relating to credit card and prepaid debit card purchases need to be retained in case you are ever audited.
Most companies focus on the sales tax that they charge their customers instead of the sales/use tax that they owe on purchases. But, when the state taxing authority shows up, both your sales and your purchases are scrutinized. When undergoing a sales and use tax audit, the auditor can review various documents including your general ledger, bank statements, credit card statements, etc. One goal of an audit is to identify any taxable purchases for which the appropriate sales tax was not charged or paid. When a prepaid debit card or credit card is used to make a purchase, proving that sales tax was charged may be a little tricky if you don’t collect and retain all receipts from all employees.
Unfortunately, credit card companies do not always list the sales tax paid on a purchase. Most charges reference the total price of the purchase, not the separately stated sales tax that may have been charged. You may have the same issue as it relates to prepaid debit cards.
This issue can lead a business owner into the murky and often frustrating world of trying to find receipts and invoices for items purchased with these cards or paying sales or use tax twice. The key to helping to navigate this process is a good record retention policy.
A record retention policy can make things very easy or very difficult when trying to supply an auditor with additional information about a credit card or debit card purchase. When creating a record retention policy, business owners need to consider materiality thresholds and how long records should be saved.
Some people think that retaining purchase invoices and receipts for “small dollar” items isn’t that important. Do you collect receipts for small dollar (i.e. $5, $10) purchases? Three little words may make you want to consider it. They are: Sample and Projection. Those seemingly inconsequential small dollar purchases can turn into big dollars flowing out of your pocket if your purchases are sampled.
Business owners also need to know how long they should retain their purchase invoices. The statute of limitations for sales tax usually ranges between 3-4 years, absent a finding of fraud. If your statute of limitations is four years and you destroy invoices after three years, you’ve got a problem. Please note that the statute of limitations varies from state to state.
Audit issues also arise when companies retain receipts where the ink has faded or the invoice is not legible. When the accounting department does not receive the appropriate backup detailing the separately stated sales tax on your purchase, you have a problem. If they never had the document, they cannot produce it for the auditor. Good luck digging in the tech’s truck!
It is important to remember to collect and retain your receipts and invoices. Print out those invoices from your internet purchases. If your receipt is on the type of paper where the ink can disappear, make a copy. Have a procedure that encourages or requires everyone with a company card to remit all receipts–no matter how small. Employees can also take pictures of receipts on their smartphones and email the images to accounting, or you can consider implementing a tool like Bento for Business, which allows employees to upload a picture of their receipt for every transaction made with a Bento card.
I also suggest that all receipts for purchases referenced on a credit card statement be filed with the credit card statement. The same advice holds for prepaid debit cards. You can also create a filing system where the receipt or invoice relating to the purchase is filed and easily retrieved. A little planning can make finding these documents again easier in the long term and relieve you of the necessity of paying sales or use tax more than once.
We know that sales and use tax can be confusing. A sales and use tax specialist can help you figure out if you are on the right track. For a quick rudimentary review of your records, visit our website and check out the Spot Check.
About the Author:
Stephanie Thomas is a certified public accountant whose career focus has been exclusively on state and local tax (SALT) issues. Stephanie worked in the SALT departments of several Fortune 500 oil and gas exploration companies before joining TT&T. She works with state tax authorities on audit issues, secures sales tax credits, and consults with clients on tax planning. She teaches Texas Taxes for the Construction Industry© and online courses to arm her students with the knowledge to protect them from sales tax risks. When Stephanie isn’t teaching, she can be found playing with her dog Leonard, enjoying a good book or traveling (as seen here in her recent trip to Italy!).