Sales Tax Audit Procedure in Texas (Nexus)
Sales Tax Verification
Sales tax collected versus sales tax reported should be reconciled in detail for every audit. Gross Sales should not include sales tax collected but:
If a taxpayer does not separate tax and selling price (Gross Sales figure includes tax), determine if:
- Total amounts, (including tax) of sales invoices are entered into the sales revenue account including exempt sales, and
- The sales price and tax rung up on the cash register is recorded in the sales revenue account.
Then determine Gross Sales by:
- Reducing the Gross Sales figures (tax included) by the amount of tax-exempt sales to arrive at total Taxable Sales (tax included).
- Dividing total Taxable Sales (tax included) by one plus the appropriate tax rate to arrive at total Taxable Sales (tax excluded).
Add total Taxable Sales (tax excluded) and tax-exempt sales to obtain a Gross Sales figure. See the following Example. Compare the Gross Sales figure to the amount reported on the tax return.
The Bar-B-Q Restaurant is located inside the city limits of a taxing city and within a taxing MTA (total tax rate is 8.25%). The total amount of sales tickets is entered in the cash receipts journal. The restaurant occasionally caters church functions, and these exempt sales are marked in the cash receipts journal. Figures from a cash receipts journal show:
Total Sales (tax included) $113,250 Less: Exempt Sales < 5,000> Equals: Total Taxable Sales 108,250 (tax included) ------- Total Taxable Sales (tax excluded) equals $108,250 divided by 1.0825 $100,000 Add: Total Taxable Sales (tax excluded) $100,000 Plus: Exempt Sales 5,000 Equals: Gross Sales $105,000
Analyze Sales Tax Accrual Accounts
Compare Tax Accrued to Tax Reported
Verify tax accrual account (also called sales tax payable account) by comparing tax accrued to tax reported for the audit period. If differences exist, determine the reason for the difference, and, if necessary, prepare a schedule and make an adjustment in the audit. Differences may occur due to:
- Other credits in the sales tax accrual account (i.e., discounts)
- Returned merchandise sales for which credit memos have not been recorded in the sales journal and/or tax accrual account
- Tax on taxable purchases being posted to the tax accrual account
Note: If the taxpayer does not maintain a tax accrual account, examine available summary records.
Analyze Debit Entries
Analyze debit entries to determine if:
- Excess tax is being written off to a miscellaneous income account
- Debit entries exist for bad debts, discounts, returned merchandise and refund claims – verify tax refund claims to determine if the customers have received them
- Debit entries are due to customers not remitting tax – verify that the taxpayer has valid resale/exemption certificates to support them
Credits and Refund Claims
During the course of an audit, a tax reconciliation is normally performed for the audit period. However, when refunds or credits have been allowed in an audit or refund period, the tax reconciliation must be expanded to include the most current report filed. This procedure is necessary in order to verify that the refund or credit has not been taken in subsequent report periods.