Article by David Joseph, co-founder, DAVO by Avalara
Sales tax audit?! No business owner wants to read those words. Being a tax collector was certainly not something you expected to sign up for when you opened your restaurant. But accurately collecting, reporting and paying sales tax is a ‘must.’ The penalties and risks associated with sales tax debt are steep.
Sales tax is a major revenue source for many states and they take compliance seriously. For one, the penalty and interest that is charged on unpaid balances can be as much as 50% of the balance due. If you fall too far behind, the State may decide to place a lien on your business which creates a host of financial problems, like getting a loan. Under state law, merchants have a fiduciary or legal responsibility to comply.
Sales tax is a personal liability. Even if you close your business, you are still personally liable for the unpaid sales tax and penalties. Even in bankruptcy, sales tax liability does not disappear. You can’t escape sales tax debt, which is why it’s so important to keep good records and comply with sales tax laws to avoid penalties and fines. Following a few best practices can help mitigate the risks and hassles of an audit.
The Importance of Organized Records
The more organized your records of sales and bank statements are, the better position you’ll be in should you be subject to a sales tax audit. One of the first steps of a sales tax audit will be to compare revenue reports from your POS system with your bank records to see if sales numbers align with your bank statement. Auditors may also look at your federal or state tax returns to compare numbers.
Ideally, you have reports from your POS or accounting system showing the total amount of sales, amount of sales tax due and the amount of sales tax collected. If you have a sales tax automation app, like DAVO Sales Tax, reports show the entire trail of sales tax due, collected and remitted to the state.
Keep in mind, the statute of limitations for a sales tax audit varies by state. In other words, a sales tax audit could happen years later. Make sure you retain records for the amount of time required by your state law.
Sales Tax Audit Gotcha’s
Even if you keep organized records, there are some red flags that could trigger a sales tax audit. Make sure to watch out for these sales tax gotcha’s:
Late Filing & Payments
Not filing your sales tax by the due date and not paying the amount owed can trigger a sales tax audit. Once late payment becomes a trend, it can be a surefire way to invite a sales tax audit. Make sure to file and pay sales tax when it’s due. Some states even offer a discount for paying on time!
Third-Party Delivery App Sales
Third party delivery apps such as Grubhub, Uber Eats and DoorDash all create additional streams of revenue, typically outside your POS system. If you don’t have 3rd party apps configured correctly in your POS, you could be underpaying or overpaying sales tax for those orders. Not to mention, the laws around who is responsible for the sales tax reporting, collection and payment is changing and varies by state. It’s important to ensure the apps are set-up correctly and you understand where the sales tax liability falls for each of them.
According to sales and use tax law, even when an item is comped, you should be paying sales tax on that comped meal. If you use the manager’s comp for staff meals, the restaurant is responsible for the use tax on the comped meal. If tax is not reported on manager comps, it will be up to the owner to pay it out of their own pockets.
Automate Your Sales Tax and Leave the Worry Behind
If you are facing an audit or you owe sales tax, consult an experienced tax attorney for assistance. One of the best ways to stop stressing and leave sales tax worry behind is to put a sales tax system in place and better yet, automate it.
DAVO Sales Tax integrates directly with the most popular POS systems in just a few minutes. From there, the app calculates sales tax daily, puts the money aside and the files and pays on time when sales tax is due. Automating sales tax takes just a few minutes to set-up and then you never have to worry about sales tax again. The app is free to try for the first month. Put your sales tax on autopilot and stop worrying about how it will get paid.
As a former restaurant owner, David Joseph is no stranger to the struggles of restaurant sales tax. A self-proclaimed sales tax evangelist, David co-founded DAVO by Avalara, a sales tax automation platform that integrates directly with the point of sale.