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They say that an ounce of prevention is worth a pound of cure. This is certainly true when it comes to sales tax audits.
In the Ideal World: Things to Do Before You Start Selling Products
The best way to survive a sales tax audit is to do things right in the first place! This is true whether you’re running a start-up or you have an existing business that’s considering expanding into another city, county or state.
Here’s what you need to do…
• Understand the applicable laws. Familiarize yourself with the sales tax laws that relate to you and the areas in which you plan to conduct business:
• What is the current sales tax rate?
• What transactions are taxable?
• Under what circumstances are sales exempt from sales tax?
• What documentation is required to exempt sales from sales tax? Be sure to keep all of these properly filled out and signed documents in one central file.
• When and how do you need to report and pay the sales tax?
• Ensure you apply the appropriate tax. Have a procedure in place to monitor, track and apply changes to tax rates in all of the places in which you are doing business. Use accounting software that allows you to easily manage multiple sales tax tables, exempt certain customers from paying sales tax, and get a report of who you’re exempting so you can easily double-check that you have proper paperwork on file.
• Pay all taxes on time. Especially if you’re dealing with multiple sales tax entities, have a system for ensuring nothing falls through the cracks.
In Reality: Things to Do When You Find Out You’re Being Audited
If you’ve done all of the things listed above, then your audit preparation is complete. You’ll just have to walk the auditor through the sales tax return and provide them with any requested documents
If you haven’t done these things, you’ll want to try to postpone the audit. Go back through all your records and get your ducks in a row. For example, if you’ve exempted sales transaction and don’t have signed resale certificates on file, go back to your customers to get them.
Need help preparing for a sales tax audit or putting a robust sales tax system in place? Give me a call. As your part-time CFO, this is one of the many services I provide.
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