Governmental Audit. That has got to be one of the scariest two words put together in business. Every business has some form of compliance risk. Whether it is the IRS sending you letters of an upcoming audit on your financial records or anything else, it’s always an uncertain feeling if you don’t know how your records look.
One major compliance risk that you might not be fully aware of is the sales tax audit. If you are selling taxable goods or services, you may be subject to a sales tax audit. The general purpose of the audit is to investigate two things. Are you charging appropriate sales tax to your customers and are you remitting the proper amount of that sales tax back to the taxing authority?
In the B2B world, the thing that always seems to come up are tax exemption certificates. If your customers are exempt from sales tax and are purchasing ordinarily taxable goods or services, they must provide a tax-exempt certificate to the you, the vendor. The vendor is responsible for reviewing the exemption paperwork and keeping the form on file. As a vendor, this is a huge audit risk and will be examined if you are audited.
When an examiner comes in to perform their audit, they likely are going to request copies of a sample of your invoices. Of those invoices that include non-taxed products or services, they are going to then require you to produce a valid sales tax exemption form. If you cannot produce a valid sales tax exemption certificate, you may be responsible to pay the tax on those goods or services that were never originally charged. This can add up quick, and if they find occurrences of invalid or missing sales tax exemptions, they will keep digging to find potentially more areas of tax due. Not only will you need to be responsible for the sales tax due, but there are potentially fines and penalties that will accompany your balance due.
Each state, or taxing authority, may also set expiration dates on sales tax exemption certificates, so you must also keep these forms up to date. If you’re reading this, you may already know the risks but might be unsure of how your recordkeeping looks. Maybe you have a binder full of these exemption forms or they are saved in a filing cabinet somewhere. Are you getting updated exemption certificates as often as you need? If the person that manages these documents disappears, do you know where to find these documents in an instant?
If you’re unsure or want to get your current process moved into the digital age for fast and secure access, Fiado has solutions for you. It starts at the beginning when a new customer applies for credit and supplies you with their tax exemption certificate. This document is saved with your profile under that customer so you always know where you can find it when you need it. Fiado can also remind you when it’s time to request an updated certificate from your tax-exempt customer. This is just another way Fiado is working to help credit managers do their work.
As with anything tax related, the information in this post is generic and based on experience and should not be relied on for tax purposes; contact your tax professional for specific guidance.
