Importance of Proper Documentation in Sales Tax Audits
When you are under a sales tax audit and want to convince an auditor that you sold merchandise to other non-retailers, you will need to produce Form ST-5 for the wholesalers that you sold merchandise to.
There is no sales tax liability on raw materials. These are business-to-business transactions that simply need to be documented correctly.
Common Issues in Sales Tax Audits
It is very common during a sales tax audit for the State’s auditor to apply sales tax to all transactions, regardless of whether they were sold to the general public at retail or to an entity exempt from routine sales tax laws.
For example:
- If you sold merchandise to a non-profit organization, you will need to have their sales tax exempt certificate as well as their 501(c)(3) tax-exempt status.
- If you are a reseller of raw materials, you will have to prove that you are in fact a reseller of raw materials. You will need to show the tax-exempt certificates of your buyers.
Real-World Example: Common Mistakes
In a recent audit, we had a client who made two critical errors:
- The client did not ask their clients for their sales tax certificates.
- The client did not save the non-profit exemption forms for their clients.
Complications from Non-Compliance
The second issue became even more complicated when it came to light that some of our client’s customers were, in fact, running charitable/non-profit organizations that had not renewed their organization’s status with the IRS and/or state.
The outcome was mitigating damages as a result of our client’s customers defrauding them by providing false and/or expired certificates.
How to Protect Your Business
Protect your business and defend your company’s future during your sales tax audit.
Ensure that you:
- Request and maintain valid exemption certificates from all clients claiming tax-exempt status.
- Verify the current status of non-profits and resellers annually.
- Organize and store documentation to prepare for potential audits.
Summary
Having the correct Georgia Sales Tax Exemption Certificates is vital in safeguarding your business against unexpected tax liabilities during audits.
Frequently Asked Questions
What documentation is required to prove sales to wholesalers during a sales tax audit?
To validate sales to wholesalers, you must provide Form ST-5, which serves as proof that the transaction was tax-exempt and conducted with a non-retailer. Without this form, the auditor may assume the sale was taxable.
Are raw material sales subject to sales tax?
No, raw material sales in business-to-business transactions are not subject to sales tax. However, proper documentation, especially buyer exemption certificates, is crucial to avoid liability during audits.
How do I prove a customer is a legitimate non-profit organization?
You must collect and keep both the customer’s sales tax exemption certificate and their current IRS-issued 501(c)(3) determination letter. Regular verification ensures their exempt status hasn’t lapsed.
What are common mistakes that lead to sales tax audit issues?
Frequent mistakes include failing to collect sales tax certificates, not storing exemption forms, and neglecting to verify the validity of those certificates. These errors can result in liabilities or accusations of non-compliance.
How can I safeguard my business from audit penalties?
Establish a process to collect, verify, and store exemption certificates annually. Staying organized and confirming the current status of resellers and nonprofits will help you defend against any audit findings.