Danger Zone: Change of Accounting Staff and Procedure

Posted by Mary Thomas on May 10, 2017 9:45:00 AM

change-of-staff.jpgWhen the accounting staff changes it is not uncommon for the manner in which transactions are documented to change. The advisability of change depends on whether the invoices actually supported the desired tax treatment of transactions before the change. If perfectly good procedures are changed for the sake of change, you could be looking at a nasty tax bill. If invoices dictate that tax was due and tax was not charged, the tax is owed.

NOTE:  The examples used reflect Texas tax rules.  However, the principal that changes in accounting/ billing procedures, the manner in which contracts are written etc., may alter tax responsibilities is universal.

A common example occurs when a company sells a service or products that have both taxable and nontaxable components. If the invoice lists all components, tax is charged on the taxable components only. If the invoice charges one lump sum for both taxable and nontaxable components of the transaction, the entire charge may be taxable.  If staff decides to change the manner in which invoices are written, they may change the tax responsiblities of the company and the customer.

Another example is changing invoices to quantify the taxable and nontaxable charges associated with the provision of nontaxable services. If the invoice lists one price for the provision of nontaxable services, no sales tax is charged. If the invoices differentiate taxable and nontaxable charges, tax is due on the taxable portions of the job.  Again, a seemingly inconsequential change in procedure may yield big, unintended consequences.

The manner in which transactions are documented matters! The manner in which items are coded, i.e. as expenses or asset capitalizations, matters. The state taxing authority typically has policy whereby the manner in which items are coded can affect taxability. Splitting the transaction in a manner that shows the provision of a taxable service and not mentioning the provision of the nontaxable service is not advisable.

Not all change is good.  Before anyone changes the manner in which invoices, contracts, bids, etc. are written, understand the ramifications of the changes to be made and whether these results are desireable.

Topics: Sales Tax

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