How to Prepare for a Sales Tax Audit

QUESTION:

How can I know if my accountant has prepared me for a possible sales tax audit?

ANSWER:

In the case of an audit of one of my firm’s clients in California, covering the tax years 2010 to 2012, the following documents had to be submitted:

•  Sales and use tax returns, including related worksheets
•  General ledger and related journals supporting tax 
return calculations
•  Sales invoices and cash register tapes (if applicable)
•  Purchase invoices (paid bills) for consumable supplies and fixed assets (i.e., furniture, fixtures and equipment)
•  Documentation supporting claimed exempt sales (i.e., resale certificates and freight bills)
•  Federal income tax returns, including depreciation schedules
•  Property tax statements
•  Sales invoices for fixed assets sold during the audit period

For our first meeting with the auditor, we organized everything on a CD and even prepared a Net Sales Calculation. We provided an Excel worksheet with documentation that concurred with the POS system’s record of net sales as well as the quarterly financial records, the quarterly sales tax filings and each year’s federal income tax returns. Our proactive and transparent approach boosted our credibility with the auditor.

We also provided a sample daily sales report from the POS system and accounting records that offered a road map of the sales calculation flow from daily sales to quarterly sales tax filings. By illustrating our method of following state procedures, we had to spend less time educating the agent and defending our filings.

This proactive approach should be part of your monthly, quarterly and annual accounting procedures so you’ll be prepared for an audit. Don’t wait to see if your accountant has assembled documents in a way that would defend a sales-and-use tax audit. While you are completing year-end tax returns, simply ask the question, “Are we ready for an audit?”

QUESTION:

Are gross receipts from some restaurant supplies purchased for resale exempt from state sales tax?

ANSWER:

As a general rule, some items are exempt, and others are not. Here in Arkansas, exempt items include paper, plastic and Styrofoam cups used for dispensing beverages as well as paper and plastic lids; paper and plastic bowls, paper boats, boxes and containers used for dispensing food items; and the wrappers for these bowls, boats, boxes and containers.

Nonexempt items include paper plates; paper and plastic straws and stirrers; plastic tableware and utensils; paper napkins; paper sacks; and premoistened towelettes.

However, restaurants that use paper plates or other containers may purchase the plates or containers exempt as a sale for resale. In other words, if your supplier charges sales tax on these items, you can obtain a valid resale certificate in your state and provide it to your supplier; this will ensure that you don’t have to pay sales tax once when buying these items and again when you charge the customer and collect the tax.
Regardless, state tax laws vary, so you must consult with an accountant in your state to get all the facts.

Michael J. Rasmussen is the owner of Rasmussen Tax Group in Conway, Arkansas. Visit rasmussentaxgroup.com for additional insight into restaurant-specific tax strategies and technology programs.