I can always tell when fall is around the corner. It isn’t because of the cool weather (which rarely appears when school is starting) or my internal Spidey sense, it’s all the Back-to School ads on TV. That, coupled with notices about tax-free weekends, always signals that school is starting soon.
While most parents are doing cartwheels at the idea of sending their kids back to school, don’t forget that kids aren’t the only ones who need to put on their thinking caps and learn something new.
When starting a business, most business owners understand the importance of addressing their sales and use tax responsibilities. That means not only understanding when to charge your customers sales tax, but also when you need to accrue the appropriate use tax. Hopefully when you hung out your shingle, you took the time to understand how to calculate total sales and taxable sales, what documentation is needed to substantiate tax-free sales, what taxable purchases are, what tax rate you should charge your customers and the taxability of the services or goods you are selling.
Even if you have taken the time to research and understand all of the things that I mentioned above, there is always something waiting to trip you up. One thing I have noticed is that business owners sometimes don’t keep track of when sales and use tax laws change. Yes, sales and use tax laws can change! And, as business owners, you are responsible for understanding and applying all the new tax laws that affect your business.
It is your affirmative duty to be educated about the sales and use tax laws that affect your business. How do you get educated? You can periodically review the sales and use tax law changes in your legislature, subscribe to newsletters and blogs that focus on sales and use tax issues, go to educational seminars geared towards your business, etc. You may be saying to yourself that you have better things to do than check what is happening in your legislature. But I have five little words that may change your attitude: notification of routine sales tax audit.
Sales and use tax audits can either go easy or hard. It all depends on whether or not you have applied the applicable sales and use tax laws correctly. If you are audited, the taxing authority does not care that you didn’t know about the law changes. They only care about whether or not you applied the law correctly.
I teach a seminar geared specifically towards construction in Texas. During one class, an attendee explained that he had been taxing his construction services a certain way for thirty years. I told him that the sales tax laws had changed in 1988 and that he was not taxing transactions correctly now. He was not happy to hear the truth, but it is better that he heard it from me than the auditor. Knowledge is power. Now, that class attendee knows what he should be doing and can decide how he wants to address past transactions.
Educating yourself is the first step to ensuring that you receive a positive audit result. In Texas and some other states, understanding that the taxability of freight is dependent on the taxability of what you are selling, or that the taxability of construction services is dependent on the type of contract you have with your customer (Texas), are just two little things that can turn your tax compliance into a nightmare if you get it wrong.