Surviving A Sales Tax Records Audit


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Information on how sales tax records audits and how to survive them.

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Surviving A Sales Tax Records Audit

  1. 1. CMKF Creim Macias Koenig & Frey LLP <ul><li>Surviving A Sales Tax Records Audit -- </li></ul><ul><li>Incomplete Vendor Sales Tax Records Could Leave You Exposed . </li></ul><ul><li>*************************************** </li></ul><ul><li>CMA WEBINAR </li></ul><ul><li>December 2009 </li></ul>
  2. 2. CMKF Creim Macias Koenig & Frey LLP <ul><li>Richard Macias is a partner with the law firm of Creim Macias Koenig & Frey LLP. The firm specializes in creditors’ rights. </li></ul><ul><li>Mr. Macias represents trade suppliers, manufacturers and financial institutions in litigation involving contract enforcement actions, bankruptcy, business transactions, bad faith claims, collections, antitrust, dealer terminations and general counsel services for a variety of business. </li></ul><ul><li>Mr. Macias received his law degree from Harvard Law School in 1975. </li></ul><ul><li>Prior to entering private practice, he served for three years as a criminal prosecutor in the office of the Los Angeles City Attorney and later was appointed to be Special Counsel to the City Attorney. He also was an Associate Professor of Law at Loyola Law School in Los Angeles, where he taught courses in litigation procedure, trial practice and negotiation skills. </li></ul><ul><li>He has written numerous articles on topics of interest to secured and unsecured creditors. He also has served on the Executive Committee of the Intellectual Property, Internet and New Technology Section of the Beverly Hills Bar Association. </li></ul>About the Speaker
  3. 3. CMKF Creim Macias Koenig & Frey LLP <ul><li>I. Sales Tax Compliance & “Resale” Certificates </li></ul><ul><li>Vendors should keep resale certificates on file as part of the company’s business records. </li></ul><ul><li>You must be able to match your sales records with the appropriate resale certificates for audit purposes. </li></ul><ul><li>You can be held liable for uncollected taxes if you accept resale certificates for sales that you know or should know are not for resale. </li></ul>
  4. 4. CMKF 1977 AP Victorious Young Athlete A Personal Anecdote Of How Things Go Very Badly When Dealing with Aggressive State Tax Authorities.
  5. 5. CMKF Creim Macias Koenig & Frey LLP <ul><li>A. Why are resale certificates required? </li></ul><ul><li>A purchase of tangible personal property for resale is NOT subject to sales or use tax provided the sale is properly documented. </li></ul><ul><li>As a result, a supplier is required by STATE LAW to ask the buyer for a resale certificate as proof that the property was purchased for resale. </li></ul><ul><li>The certificate must be obtained on a timely basis, and it must include certain specific information. </li></ul>
  6. 6. CMKF Creim Macias Koenig & Frey LLP <ul><li>What information must a resale certificate include? </li></ul><ul><ul><li>California, for example, does not have a mandatory official form although there is a form of certificate provided as an example in the regulations of the State Board of Equalization (our tax authority). </li></ul></ul><ul><ul><li>The certificate may be in any form, such as a handwritten note, letter, or memorandum. </li></ul></ul>
  7. 7. CMKF Creim Macias Koenig & Frey LLP CA Reg. 1668 Form Sample
  8. 8. CMKF Washington Form Sample
  9. 9. CMKF “ Multi- Jurisdiction” Form Sample
  10. 10. CMKF “ Multi- Jurisdiction” Form Sample
  11. 11. CMKF Creim Macias Koenig & Frey LLP <ul><li>However, the certificate must contain the following information: </li></ul><ul><ul><li>The name and address of the purchaser. </li></ul></ul><ul><ul><li>The number of the seller's permit held by the purchaser </li></ul></ul><ul><ul><li>A general description of the property purchased. </li></ul></ul><ul><ul><li>The certificate must contain words that state the property will be resold or is for resale . The use of words such as nontaxable or exempt or similar terms is not acceptable. </li></ul></ul><ul><ul><li>The date of the document and the signature of the purchaser or someone approved to act in his or her behalf. </li></ul></ul><ul><ul><li>A fax or .pdf copy vs. original? </li></ul></ul>
  12. 12. CMKF Creim Macias Koenig & Frey LLP <ul><li>What are my responsibilities as a seller accepting a resale certificate? </li></ul><ul><li>If the nature of the business is such that the property purchased would not normally be resold, you should question the use of the certificate. </li></ul><ul><li>If the purchaser insists that the item is to be resold, you should ask for a resale certificate stating that the specific property is being purchased for resale in the regular course of business. If the purchaser is unwilling to provide one, you should consider the sale as taxable. </li></ul><ul><li>You are required to obtain a resale certificate in a timely fashion. That is, it must be obtained: </li></ul><ul><ul><ul><li>Before you bill the purchaser for the property, or </li></ul></ul></ul><ul><ul><ul><li>At any time within your normal billing and payment cycle, or </li></ul></ul></ul><ul><ul><ul><li>At any time prior to delivery of the property to the purchaser </li></ul></ul></ul>
  13. 13. CMKF Creim Macias Koenig & Frey LLP <ul><li>E. What are a Sellers Permit or Reseller's License or Sales Tax ID vs. a Resale or Tax Certificate ?  </li></ul><ul><li>A Reseller's Permit (in California) or Sales Tax License or Tax ID. These are state issued and are essentially licenses to do business. </li></ul><ul><li>   A Resale Certificate or Tax Certificate is a simple certification from your customer that all purchases are for resale, not for personal use. </li></ul>
  14. 14. CMKF Creim Macias Koenig & Frey LLP Can I find out if a Seller's Permit number is current? Most states have an online or telephonic system that allows you to verify the seller's permit number. In California, for example the tax Board's has an online Seller's Permit Verification feature. There is no service to give you a copy of a buyers Resale Certificate. These are not recorded anywhere by the state. YOU must get one signed by the buyer and keep the form on hand.
  15. 15. CMKF Creim Macias Koenig & Frey LLP <ul><li>F. The State of the Internet Sales Tax… </li></ul><ul><ul><li>I n 1992, the Supreme Court ruled </li></ul></ul><ul><ul><li>a state can’t make a company with no </li></ul></ul><ul><ul><li>physical presence in the state collect </li></ul></ul><ul><ul><li>state sales tax. That means that all the </li></ul></ul><ul><ul><li>“ dot com” retailers, for example, may </li></ul></ul><ul><ul><li>only be required to collect sales taxes </li></ul></ul><ul><ul><li>in states where they have facilities, and </li></ul></ul><ul><ul><li>not in others. </li></ul></ul><ul><ul><li>There is an effort under way to change that. Legislators are expected to introduce bills in the House and Senate promising to do away with the “physical presence” requirement. If a bill passes — it would require all online retailers, with some minor exemptions for very small businesses, to collect sales taxes. </li></ul></ul>
  16. 16. CMKF Creim Macias Koenig & Frey LLP <ul><li>… And Employee Sales. </li></ul><ul><li>Sales of tangible personal property to employees are subject to sales tax on the purchase price paid by the employee. </li></ul><ul><ul><li>Such purchase price may be discounted from the price charged to the general public. </li></ul></ul><ul><ul><li>Generally, if such a discount exceeds the employer’s cost of the item sold, the employer must pay a use tax on the difference between the purchase price paid by the employee and their cost. </li></ul></ul>
  17. 17. CMKF Creim Macias Koenig & Frey LLP <ul><li>G. Surviving A State Sales Tax Audit </li></ul><ul><li>If the audit notification has already arrived, you must begin gathering the necessary documentation and conduct a “private” audit before the auditor arrives. Try to address correctable conditions , such as those dealing with documentation errors in advance. </li></ul><ul><li>Expect the auditor to perform detailed tests such as tracing individual transactions involving sales to the company’s books of account, validating that tax rates billed on transactions are correct at the time of the billing, and verifying that current reseller’s certificates are on hand for customers claiming exempt status. </li></ul>
  18. 18. CMKF Creim Macias Koenig & Frey LLP <ul><li>From a documentation standpoint, the auditor is likely to want to have access to and inspect documents such as: </li></ul><ul><ul><ul><li>The company’s income tax returns for the period under audit, </li></ul></ul></ul><ul><ul><ul><li>Trial balances and general ledgers, </li></ul></ul></ul><ul><ul><ul><li>Sales journals, </li></ul></ul></ul><ul><ul><ul><li>Invoices, receipts, and credit memos supporting sales transactions , </li></ul></ul></ul><ul><ul><ul><li>Exemption certificates for customers , </li></ul></ul></ul><ul><ul><ul><li>Purchase journals and records, </li></ul></ul></ul><ul><ul><ul><li>Cash journals, </li></ul></ul></ul><ul><ul><ul><li>Bank statements </li></ul></ul></ul><ul><ul><li>One strategy for bringing a sales and use tax audit to conclusion as quickly as possible is to have all of the documents the auditor requests available when the auditor arrives. This provides a clear signal to the auditor that you are cooperating with the auditor and are anxious to bring the audit to closure as quickly as possible. </li></ul></ul>
  19. 19. CMKF Creim Macias Koenig & Frey LLP
  20. 20. CMKF Creim Macias Koenig & Frey LLP <ul><li>Once the audit is in process, you need to balance cooperation without volunteering more than necessary. </li></ul><ul><li>Mobilize the resources to the audit immediately. Get a fast and accurate self assessment of your vulnerabilities and play an active role in minimizing exposure. </li></ul><ul><li>Assemble a team, including representatives from credit, accounting and legal. Y ou do not want an unsupervised state bureaucrat rummaging around with carte blanche in your company files. </li></ul>
  21. 21. <ul><li>RICHARD C. MACIAS </li></ul><ul><ul><li>Creim Macias Koenig & Frey LLP </li></ul></ul><ul><ul><li>633 West Fifth Street, 51st Floor </li></ul></ul><ul><ul><li>Los Angeles, California 90071 </li></ul></ul><ul><ul><li>Tel: 213-614-1944 </li></ul></ul><ul><ul><li>Fax: 213-614-1961 </li></ul></ul><ul><ul><li>Email: [email_address] </li></ul></ul><ul><ul><li>Web: </li></ul></ul><ul><li>© 2009 Richard C. Macias. All rights reserved. </li></ul>