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How to Avoid the #1 Sales Tax Bookkeeping Mistake

  • Oct 7, 2015 | Avalara

Small businesses have plenty of tax records to keep. Avoidable business bookkeeping mistakes can lead to nasty consequences, like tax audits, fines, and penalties.

The IRS and many local tax authorities provide plenty of guidance on business tax record-keeping, and they expect you to understand and carefully follow their rules. 

Ecommerce sellers have a special burden in keeping sales tax records because they are usually conducting transactions in more than one state. They must maintain sales tax licenses not only where they are based, but also in those states where they have nexus. If they don't carefully track the rules that apply to each transaction in each state where they do business, sellers set themselves up for serious liability issues.

The #1 Mistake

It's the need to manage so many moving parts that get sellers in trouble. This complexity is what causes them to make what we're calling, "the number one mistake in sales-tax bookkeeping": They simply don't pay what they owe to whom they owe it.

Jerry Peisner, Texas CPA and Partner at Peisner Johnson & Company, L.L.P., says he sees this issue often with businesses of all sizes. But he also says that most bookkeepers and accountants don’t notice an issue unless they are managing the tax accounts on a daily basis and see every transaction.

“It’s not usually until clients are being audited that I know there’s a problem,” he states.

Keep an Eye on the Accounts

What should be happening is the balances in the accounts dedicated to tax liability should be increasing as taxes are collected and decreasing as taxes are remitted to the respective states. Frequently, however, sellers set up their accounts and forget to monitor them. While this is usually unintentional, tax authorities take a dim view of this mistake and levy fines and penalties for nonpayment.

Sometimes sellers run across this problem when they mistakenly collect taxes on transactions on which they aren't required to pay taxes, or when they’re not licensed to collect taxes in that state. They’re most likely to forget about those accounts because they may not have filing notifications set up with those states. Nonetheless, they’ve created a liability for themselves by making the error.

Get Those Books in Order

“You can’t remit taxes in states where you have no sales tax license,” Peisner states. “But, sellers can’t keep tax funds, either. In those cases, sellers need to refund those taxes to buyers and reflect that refund clearly in their books.” 

In fact, he admonishes sellers to be rigorous about reflecting every transaction accurately in their books. “Sellers can be fined for poor record-keeping,” he says.

To avoid making this top mistake in sales tax bookkeeping, follow Peisner's guidelines:

  1. Establish separate accounts for each state where you’re required to collect taxes, and make sure you’re filing manually or automatically on time.
  2. Ensure you have sales tax permits in each state that requires you to, but don’t collect taxes in states where you are not required to do so.
  3. Properly record tax liability in each state’s account, track each incoming and outgoing transaction, and remit taxes to the right states. Remitting them to the wrong states and neglecting to pay the states you actually owe can lead to penalties.
  4. Carefully track and document each payment, including refunds, and reconcile your balances every time you remit a payment to the states to which taxes are owed.
  5. Frequently review your sales tax records to make sure they’re being properly managed. Tax authorities are expecting compliance, not excuses.
  6. If you voluntarily get a permit in a state, make sure you collect taxes and remit returns and payments in that state.
  7. Make sure your account does not accumulate collected taxes. There are times it should be empty of funds because you’ve paid the taxes.

Don't let the business of keeping your sales tax books fall by the wayside. Avoid the biggest mistake of all -- not paying who you should when you should -- and the headaches that come with it.

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.
Avalara helps businesses of all sizes get tax compliance right. In partnership with leading ERP, accounting, ecommerce, and other financial management system providers, Avalara delivers cloud-based compliance solutions for various transaction taxes, including sales and use, VAT, GST, excise, communications, lodging, and other indirect tax types. Headquartered in Seattle, Avalara has offices across the U.S. and around the world in Brazil, Europe, and India.