How to Set Up an Invoice

Importance of Proper Invoicing in a Sales Tax Audit

During a sales tax audit, presenting the correct invoices in the correct form is of utmost importance. You need to break out the sales tax and other non-taxable charges on the invoice.

If you lump everything together, you will be charged taxes on the gross receipt.

Transcript

Introduction

Hi, my name is Mansoor Ansari and we’re back for another video. So today we’re going to discuss the crux of a sales tax audit which is your invoices. Now this is how you invoice your customers. So watch this.

Example: Invoice A

Let’s call this Invoice A:

You sold a chair for $100.
You did delivery on that chair for $50.
You charged tax worth $10 (assumed correct for the jurisdiction).
The total is $160.

This is an example of a really good invoice that you can give to your clients because:

The chair that was sold is a tangible item.
The delivery fee of $50 is separately listed.
The sales tax is clearly broken out.

Common Mistake and Penalty

Let’s assume someone just said this invoice is only worth $160.

The problem: Under a sales tax audit, you get penalized for tax on top of the $160.

In a transaction like this:

The delivery fee isn’t even taxable.
Why? Because it’s broken out separately and a third-party carrier was used.

It’s not like you got your brother to go deliver the chair for you.

Key Takeaway

Anytime you’re looking at invoices, you’ve got to set them up correctly, otherwise:

The auditor is going to assume things like delivery are taxable.
Tax will be double taxed.

Thanks.

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