Business owners often make mistakes when it comes to sales tax calculations and filings which can result in penalties and interest. Today I’m going to discuss some of the typical errors so you hopefully don’t make any of them in your business.
The first thing to remember is that sales should be considered taxable unless there is a specific exemption. Any exemption you claim must be supported by documentation. Sometimes an entrepreneur assumes their sales are not taxable because they are selling food, or they provide a service. This is not always the case.
Another mistake is to have a discrepancy between recorded and reported sales. This could be due to improper posting of transactions in your accounting file (for instance not properly recording allowable bad debt, returned taxable merchandise or tax paid purchases resold prior to use.) It could also be due to a poor accounting process. An auditor will examine your paperwork/accounting file and will need to understand why the figures are different from the return. If the difference is not for allowable reasons, you will most likely be charged the underpaid tax plus penalties and interest.
A third mistake is not calculating sales tax for the correct jurisdiction. In-person purchases are charged the sales tax rate for that particular location, but for items being shipped, tax due is based on the delivery address. Even if the purchaser is not in state, if the product is delivered to another location in the same state (for instance a gift shipped to a friend or family member), it is subject to tax.
Avoid these common mistakes to prevent owing additional tax, interest and penalties in the event of an audit. Contact your sales tax agency for clarification in writing if you are unsure how tax applies to your industry.