ACCOUNTING FOR SALES TAX PROFESSIONALS

Transcription

1 ACCOUNTING FOR IPT ANNUAL CONFERENCE SALES TAX PROFESSIONALS Suzanne Wilson Jeff McGhehey, CMI Sr. Mgr. Transaction Tax Sr. Mgr. Indirect Tax American Airlines The Home Depot Phoenix, AZ Atlanta, GA

2 LEARNING OBJECTIVES IPT 2014 ANNUAL CONFERENCE Understand how sales and use taxes impact the financial statements Understand basic accounting principles related to sales tax collection and use tax accrual Review typical accounting entries to record sales tax and use tax transactions Review the sales and use tax reconciliation process Understand how reserves are used to estimate and record audit liabilities 2

3 SALES/USE TAX & FINANCIAL STATEMENTS Understand how sales and use taxes impact the financial statements Sales and use taxes may have a material impact on a company s financial statements, so understanding how they impact the balance sheet and income statements is vital. Awareness of how sales/use taxes impact your income statement will help you be a better partner with the operational side of your business. 3

4 SALES/USE TAX & FINANCIAL STATEMENTS Sales and use taxes transactions may impact either the balance sheet or income statement or both. Balance Sheet Sales tax (accruals and payments) Use tax (accruals and payments) Use tax (accrued on asset purchases) Audit reserves 4

5 SALES/USE TAX & FINANCIAL STATEMENTS Income Statement Sales tax (tax expense) Vendor paid tax typically follows accounting of underlying transaction Use tax (tax expense) Accrued use tax on expense payables typically follows accounting of underlying transaction Audit reserves 5

6 SALES/USE TAX & FINANCIAL STATEMENTS 6

7 BASIC ACCOUNTING PRINCIPLES Understand basic accounting principles related to sales tax collection and use tax accrual 7

8 SALES TAX VS USE TAX Sales tax is imposed on the sale or lease of goods and services and is collected at the time of sale. States imposing sales tax also impose a use tax, sometimes called a compensating use tax, on buyers of TPP where sales tax is not paid. Sales and use tax together provide a uniform tax upon either the sale or use to TPP irrespective of where it was purchased. 8

9 SALES TAX VS USE TAX Sales taxes are collected by vendors in most states. Some states impose a sellers use tax. This tax is collected by a vendor making retail sales in a state they are not physically located in but have nexus. Use taxes are self assessed by the purchaser. When a company bills its customers for sales taxes, those taxes are not an expense to the company; they are an expense to the customer. When a company accrues use tax on purchases, those taxes are an expense to the company. 9

10 SALES TAX VS USE TAX It is common to have separate sales tax liability accounts for each state. If a company operates in multiple states, having a separate account for each of the sales tax collected makes it much easier to pay remittances. It also reduces the work required to justify the company s remittance in a sales tax audit. 10

11 SALES TAX COLLECTION When you bill a customer for sales tax, the journal entry is a debit to the accounts receivable asset for the entire amount of the invoice, a credit to the sales account for that portion of the invoices attributable to the goods or services billed, and a credit to the sales tax liability account for the amount of sales tax billed. 11

12 RECORDING SALES TAX COLLECTION Record July 1 sale and 6% sales tax liability General Journal J1 Date Account Titles and Explanation Ref. Debit Credit Jul. 1 Accounts Receivable Sales Sales Tax Liability (Record day's sales and sales tax liability) Total debits must always equal total credits

13 SALES TAX REMITTANCE At the end of the month (or longer, depending on your remittance arrangement), you fill out a sales tax remittance form that itemizes sales and sales taxes, and send the government the amount of the sales tax recorded in the sales tax liability account. This remittance may take place before the customer has paid you for the sales tax (credit transactions) 13

14 REMITTING SALES TAX COLLECTED Record July sales tax liability paid General Journal J2 Date Account Titles and Explanation Ref. Debit Credit Aug 20 July Sales Tax Liability Cash (Record July s sales tax liability remitted) Total debits must always equal total credits

15 RECORD ACCOUNTS RECEIVABLE COLLECTION If you file and pay your sales tax return on a timely basis, some states allow you to keep a portion of the sales tax as a discount. The amount of the discount varies and is, most often, a percentage of the sales tax collected. 15

16 REMITTING SALES TAX COLLECTED Record July sales tax liability paid with discount General Journal J2 Date Account Titles and Explanation Ref. Debit Credit Aug 20 July Sales Tax Liability Discounts.60 Cash (Record July s sales tax liability remitted) Total debits must always equal total credits

17 RECORD ACCOUNTS RECEIVABLE COLLECTION When the customer pays you for the invoice, you debit the cash account for the amount of the payment and credit the accounts receivable account. 17

18 RECORD ACCOUNTS RECEIVABLE COLLECTION Record accounts receivable invoice paid General Journal J3 Date Account Titles and Explanation Ref. Debit Credit Aug 1 Cash Accounts Receivable (Record accounts receivable invoice paid) Total debits must always equal total credits

19 CREDITING SALES TAX CHARGED What if the customer does not pay the sales tax portion of the invoice? In that case, you issue a credit memo that reverses the amount of the sales tax liability account (and which is also a reduction of the accounts receivable asset account). It is quite likely that you will have already remitted this sales tax to the government, so the customer's non-payment becomes a reduction in your next sales tax remittance to the government. 19

20 RECORDING SALES TAX COLLECTION IPT 2014 ANNUAL CONFERENCE Credit sales tax charged on invoice General Journal CM1 Date Account Titles and Explanation Ref. Debit Credit Jul 31 Sales Tax Liability Accounts Receivable (Record credit sales tax liability) Total debits must always equal total credits

21 USE TAX ACCRUAL Use tax is assessed upon TPP purchased by a business of the assessing state for use, storage, or consumption in that state (not for resale), regardless of where the purchase took place. Use tax applies when a business purchases an item that does not include sales tax. Usually, this is due to out-of-state purchases or purchases over the internet. The use tax is typically assessed at the same rate as the sales tax that would have been owed had the same goods been purchased in the state of residence. 21

22 USE TAX ACCRUAL Not all use tax derives from sales transactions. There are also internal transactions a company might initiate that will trigger use tax consequences. For example, ABC Furniture Company buys its inventory tax-free with a resale certificate, then charges sales tax to its customers. But if this company removes furniture from inventory for its own use, it has triggered a tax incident: use tax is due on the converted inventory that is being used, not sold. 22

23 RECORDING USE TAX LIABILITY IPT 2014 ANNUAL CONFERENCE Record July 1 use tax liability General Journal J4 Date Account Titles and Explanation Ref. Debit Credit Jul. 1 Inventory Inventory use tax Office Supplies Office Supplies use tax Cash Use Tax Liability (Record use tax liability on purchases) Total debits must always equal total credits

24 REMITTING USE TAX LIABILITY IPT 2014 ANNUAL CONFERENCE Record July use tax liability paid General Journal J5 Date Account Titles and Explanation Ref. Debit Credit Aug 20 July Use Tax Liability Cash (Record July s sales tax liability remitted) Total debits must always equal total credits

25 THE SALES AND USE TAX RECONCILIATION PROCESS Definition: Reconciliation is the process of comparing information that exists in two systems or locations, analyzing differences and making corrections so that the information is accurate, complete and consistent in both locations. 25

26 THE SALES AND USE TAX RECONCILIATION PROCESS Balance sheet accounts must be reconciled on a periodic and timely basis to verify that all items were correctly posted to the account. Sales tax liability accounts are often subject to Section 404 of the Sarbanes-Oxley Act (SOX). The reconciliation may be one of the tests to establish that the control has sufficient internal controls around financial reporting. 26

27 SALES TAX RECONCILIATION Steps for monthly reconciliation: 1. Begin with verifying the opening balance in the G/L for the month 2. Review the sales tax activity posted to the account to ensure that items are properly classified 3. Review all payments posted to the account are properly classified 4. Confirm the ending balance per the reconciliation agrees to the general ledger balance 27

28 SALES TAX RECONCILIATION PROCESS Date Description Debit (Credit) Balance July 1 Balance Forward (43,000) July 20 Payment June Liability 43,000 0 July 31 July Sales Tax Collected (35,000) (35,000) Aug 20 Payment July Liability 35,

29 SALES TAX RECONCILIATION PROCESS IPT 2014 ANNUAL CONFERENCE Date Description Debit (Credit) Balance July 1 Balance Forward (25,000) July 20 Payment June Liability 25,000 0 July 10 Prepayment #1 of July Liability 15,000 15,000 July 20 Prepayment #2 of July Liability 15,000 30,000 July 31 July Sales Tax Collected (23,000) 7,000 G/L Balance consists of: Credit from overpayment on July Return (apply to Aug. return) 7,000 29

30 SAMPLE BALANCE SHEET ABC Manufacturing, Inc. Balance Sheet July 31, 2013 Cash $ 2,000 Accounts Receivable 2,106 Office Equipment $ 5,000 Less: Accumulated Depreciation 2,000 3,000 Total Assets $ 7,106 Liabilities Liabilities and Owner s Equity Accounts Payable $ 500 Sales Tax Payable 6 Total Liabilities 506 Owner s Equity Common stock 5,000 Retain earnings 1,600 Total liabilities and owner s equity $ 7,106 30

31 RESERVES FOR AUDIT LIABILITY FAS 5 / ASC Accounting for Contingencies A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur. A liability is a known obligation. Indirect taxes tend to be liabilities rather than contingencies 31

32 RESERVES FOR AUDIT LIABILITY A contingency exists if the loss is either: Probable (more than 65-75% likely to occur); or Reasonably estimable If both conditions apply, then the contingency has become a liability and must be recognized in the financial statements. 32

33 RESERVES FOR AUDIT LIABILITY Common reasons for contingencies or liabilities. Nexus Audit assessments Tax Matrix Errors Exemption Certificates Use tax accrual procedures Unusual transactions 33

34 RESERVES FOR AUDIT LIABILITY Initially, a sales and use tax audit may be considered a contingency, assuming no issues are known at the outset of the audit. If issues are known to exist, then a liability should be recorded in the financial statements. For example, a prior audit in the same jurisdiction or knowledge of existing exposure; and the amounts are probable and estimable. 34

35 RESERVES FOR AUDIT LIABILITY Estimating a liability: Audits Prior audit experience Average percentage error of expense payables Average percentage error of exempt sales Exempt Customers Non-taxable Items Short tests of current audit period 35

36 RESERVES FOR AUDIT LIABILITY Should the audit results in one state provide insight into the audit reserves in another jurisdiction? Generally speaking, yes. Consider your industry and business practices in states where you do business. Are they consistent or are they unique from state to state? Consider your accounting systems and your processes. Are they automated or manual? 36

37 RESERVES FOR AUDIT LIABILITY Entry to record liability General Journal J5 Date Account Titles and Explanation Ref. Debit Credit 8/31 Tax Expense (Income Statement) 152,000 Accrued Tax Liability (Balance Sheet) 122,000 Accrued Interest Liability (Balance Sheet) 30,000 (Record August Sales Tax Reserves) Total debits must always equal total credits 152, ,000 37

38 RESERVES FOR AUDIT LIABILITY Entry to record payment of audit and release of excess reserves General Journal Date Account Titles and Explanation Ref. Debit Credit 12/15 Accrued Tax Liability (Balance Sheet) 127,000 Accrued Interest Liability (Balance Sheet) 22,000 Other Income (Income Statement) 3,000 Cash (Balance Sheet) 149,000 (Pay Sales Tax Audit Liability) J5 Total debits must always equal total credits 152, ,000 38

39 RESERVES FOR AUDIT LIABILITY Best Practices: There is no such thing as a good surprise. Keep management informed of both good and bad. Document your positions. Whether or not you accrue a liability, your financial statement auditors may request documentation to establish the reasonableness of your decisions and estimates. 39

40 IPT ANNUAL CONFERENCE IPT 2014 ANNUAL CONFERENCE Questions 40