I recently came across a recording of Wizard of Oz in my DVR and I immediately started drawing parallels between those characters and the state tax world. Some clients are like Dorothy, thrown into a strange world (state and local tax), but willing to follow the yellow brick road on what can be a harrowing journey. Others are like the Lion, praying for courage or like Oz, hiding behind a curtain and making up stories to keep everything running smoothly.
One character some customers want me to be is Glinda, the Good Witch. Yes, she isn’t as endearing as Dorothy, or as cuddly as Toto or delightfully campy like the Wicked Witch. But Glenda has her good points including a great sense of fashion and the ability to perform magic at just the wave of her glitter-coated wand.
But even Glinda can’t make a valid audit deficiency go away. Once the tax man comes, you should be proactive to make sure the audit is conducted fairly and accurately. If a tax bill is valid, the deficiency will not just disappear--no matter how many times you wish upon a star.
The key to a happy audit result is understanding your responsibilities before the auditor knocks on your door. Understanding when you should charge sales tax, when you should accrue use tax, and how contract types and invoicing affect your business is imperative. Maintaining the appropriate records is also important. Copies of your general ledger, exemption certificates, customer or job listings, sales invoices, shipping documents, contracts and purchase invoices are some of the records that you should retain in case you are ever audited.
Each taxing authority has their own statute of limitations. In Texas, the statute of limitations (unless there is fraud) is four years. That means, keep your records at least that long. The normal range nationwide is three to four years. Keep that in mind as your business activities expand.
While your CPA and sales tax consultant are resources, we cannot work miracles. If something is taxable, we cannot wave a wand and make it nontaxable. As business owners, you must be proactive in understanding your business and how a jurisdiction’s sales and use tax laws affect you.
So, when you are adding to your lines of business, expanding into different states, making large dollar purchases, opening locations or making renovations, remember there are sales/use tax consequences. Don’t wait until a house falls on you. Give your CPA or a sales tax consultant a call, before you are audited.