Auditors review two areas during an audit: sales and purchases. This article focuses on the review of sales invoices. If this area is handled incorrectly, the Comptroller will seek the deficiency from the party being audited. However, the deficiency is the liability of the purchaser and the seller may seek compensation from the purchaser for any assessment of tax.
Make sure invoices completely and accurately (1) describe what products and/or services are being purchased and (2) memorialize the transaction in a manner that dictates the tax treatment planned by the buyer and seller. There is absolutely nothing worse than a taxpayer stating that they provided a nontaxable service and noting that all the invoices clearly name the taxable component of the service with no mention of the nontaxable components. This is problematic for several reasons:
- On its face, the transaction is taxable. The presumption is that the invoice correctly states the product and/or service being purchased in real time. It is hard to convince an auditor that the invoice is incorrect and the correction of the invoice means that the transaction is no longer taxable. The presumption may be overcome in some instances but it may be difficult. Can you imagine if taxpayers could restate invoices during an audit and change transactions from taxable to nontaxable with little corroborating proof?
- Even if the transaction is not taxable and it can be proven, sometimes quantifying the taxable component of a nontaxable transaction results in the taxation of the quantified taxable portion of the transaction.
It is imperative that invoices (and all other documentation) support the tax treatment of the transaction. If an auditor states that a transaction is taxable due to inaccurate information on an invoice, it costs the taxpayer unnecessarily to prove the auditor incorrect. Audit findings are presumed to be correct. Taxpayers typically pay internal staff and third parties when proving audit findings are not accurate. It is a money drain that can be avoided by accurately and consistently documenting transactions.
Take the time to review contract terms, pay applications, invoices and all other documentation of the transaction to ensure proper taxation. It is a good practice to have large dollar items and large volumes of small dollar transactions reviewed. Interim reviews or project reviews are imperative until your accounting team is confident about applicable sales and use tax.