Sales tax can be complex for large and small businesses alike. Paying sales tax incorrectly throughout the year, or reporting sales tax incorrectly on your return, can trigger a sales tax audit. The Connecticut State Department of Revenue Services (DRS) tracks business’s sales taxes in CT, and misfiling can mean a CT DRS sales tax audit. Here’s how to avoid a sales tax audit in Connecticut, and what to do if you find yourself facing a DRS sales tax audit.
CT DRS Sales Tax Audits: How to Avoid an Audit
Maintain Good Record-Keeping
This is the best way to avoid an CT DRS sales tax audit, and this is an absolute must. Accurate record keeping will help you accurately submit sales tax payments throughout the year, and reconcile your records when you submit your income tax returns. If you are audited, you can use your records to show that you properly reported, or you’ll be able to see where a mistake was made. A point-of-sale system will record this for you with each purchase made. You’ll also want to keep records quarterly when you submit sales tax payments, and annually when you file your return.
To avoid an CT DRS sales tax audit, here’s what your business records should contain:
- Amount of each sale
- Amount of sales tax paid by the customer
- Date of sale
- Location of the sale (in your Connecticut store or online)
- Amount of quarterly sales tax paid and date submitted
Have a Strategy
Collecting loose receipts and approximating sales tax payments every quarter is not a good system. This is likely to result in a sales tax audit sooner rather than later. To prevent an audit and to defend yourself if you are audited, you must have an organized strategy and a plan for making accurate sales tax payments and income tax payments.
There are several ways to approach your sales tax to prevent an audit. Some of these require more initial set-up, while others require more day-to-day maintenance. Which is best for you will depend on your business type, sales volume, and your personal work style.
- Point-of-sale system: With the right POS system, you can see exactly how much sales tax was paid on every item for a given time period. Simply print the receipt or check your records to see how much you must pay or have paid. This will require that every sale accurately moves through your POS system, and that employees understand the importance of recording sales tax.
- Paper records: At the end of business each day or, depending on sales volume, each month, record how many sales you made and how much sales tax was paid. Then, you’ll need to tally this when making sales tax and income tax payments. Keep your ledger organized, with careful dates and amounts.
- Electronic records: Some programs will connect to your POS system and make sales tax calculations for you. This is a great way to maintain accuracy with minimal effort. This is also ideal for people who sell products online and are already computer savvy.
What Triggers a CT DRS Sales Tax Audit?
There are simply too many businesses and not enough staff for the CT DRS to conduct a sales tax audit on everyone. Therefore, the CT DRS uses certain activities as signals to detect the likelihood of sales tax being paid or calculated incorrectly. Avoiding these common issues can help you avoid a sales tax audit.
Matching Federal Return to Sales Tax Returns
When you file your federal tax return, you’ll have to state your total sales and sales tax for the year. If this doesn’t match the sales tax you declared throughout the year, it means, somewhere, an error was made. This is very likely to trigger an audit. Since this is simply matching numbers in an automated system, it’s easy for the DRS to check.
Problems With Returns
Many businesses have return policies to keep customer satisfaction high. If a customer buys the wrong size, color, or simply changes their mind about an item, it’s helpful if they can return it for a refund. However, the sales tax on this sale was already recorded. You’ll need an accurate and systematic way to zero out this purchase on your books, or it will likely result in mismatched returns (see the point above).
Improperly Recording Out-of-State Purchases
This is a common problem for businesses selling goods online, working with clients in multiple states, or businesses operating close to a border. If a customer buys an item in another state and pays sales tax, that tax should go to that state.
Like so many other tax laws, the internet has introduced new challenges when it comes to out-of-state purchases. Now, your customers might buy from all over the country and all over the world. It’s a good idea to consult with a tax attorney when you’re making a lot of sales across the country, or you’re making a few, big-ticket sales. Calculating out-of-state sales tax incorrectly can trigger a sales tax audit.
When calculating out-of-state sales tax, it’s helpful to consider the tax nexus. Rules vary between states but, in general, a tax nexus is a good way to figure out whether you owe sales tax in another state.
For example, you have a tax nexus, or a taxable connection, to Connecticut if any of the following are true:
- You operate an office or store in CT
- Your employee or independent contractor is present in the state for more than 2 days a year
- You store goods in a CT warehouse
- You own real or personal property in CT
- You delivery merchandise in CT in vehicles that you or your business owns
Incorrect Resale Certificates
Generally, sales tax applies when the item reaches the end consumer. If you are purchasing an item for resale, you’ll need a resale certificate to show you do not need to pay sales tax on this purchase. If you don’t have these, or if some of them are missing, it can trigger an audit.
Sales tax is important at the end of the year when you file income taxes, but it is also important to keep accurate records throughout the year as you pay sales tax. Remember, even if you make no sales in a quarter, you still must submit a quarterly sales tax statement, or the CT DRS will consider your account delinquent. If you’re facing a CT DRS sales tax audit, or you have questions about your record-keeping or payments, we can help. Visit our webpage on sales tax audits to learn more, schedule a consultation online with one of our business tax experts or give us a call at 877-922-7569.