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Texas: Why You Should Keep Excellent Records

  • Aug 19, 2014 | Gail Cole

 How good are your sales and use tax records?

Noncompliance with sales and use tax can get a business in a heap of trouble.

A lot of businesses make good faith efforts to charge, collect and remit the correct amount of sales and use tax. Most, in fact. That’s one reason state auditors go to such great lengths to ensure noncompliant businesses are uncovered and made to pay what they should (plus penalties and interest). It’s all in the name of fairness.

Auditors rely heavily on business records to determine whether or not the proper amount of sales tax has been collected and remitted. When businesses cannot provide accurate records for an audit period, auditors are forced to extrapolate from what records they do have. An audit finding recently upheld by the Texas Comptroller of Public Accounts illustrates just that.

A restaurant in Texas audited for the period April 1, 2007, through December 31, 2010, was found liable for sales and use tax and assessed penalties and interest on top of the tax owed. During the audit the taxpayer produced incomplete records, many of which were damaged and unreliable.  As a result, the auditor “issued a Notification of Estimation Procedures advising Petitioner that the audit would be estimated.”

The auditor relied on guest service tickets for October 2007 and monthly bank statements for the years 2009 and 2010, except for the months of October and December 2009, “for which bank statements were not provided.”

The precise method used by the auditor to calculate the tax owed is explained in the Comptroller’s Decision. Ultimately, the auditor found an overall error rate of 95.73% for the audit period. Penalties were not waived because the auditor determined the taxpayer “had not shown reasonable diligence.” Furthermore, the auditor “referred the case for the imposition of the additional 50% penalty,” which was approved because of the high error rate and the fact that the taxpayer was involved in the daily operations of the restaurant.

The taxpayer requested redetermination, contesting the following:

  • The 50% fraud penalty and the 10% late penalty should be waived.
  • Insolvency relief is warranted.
  • The auditor erred in marking up the sales.
  • The auditor erred in not taking into account theft, spillage and promotional giveaways.

But when a taxpayer has “not shown reasonable diligence” in submitting the proper tax and keeping proper records in the first place, the Texas Comptroller of Public Accounts is not likely to feel lenient or particularly merciful.

Reasonable diligence

The decision underscores the fact that retailers and sellers “are required to keep records that reflect the total gross receipts from sales and the total purchases of taxable items.” Inadequate records give the Comptroller authorization “to estimate a taxpayer’s liability on the best information available.”

If that’s not a good reason to keep excellent records, what is?

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.