Sales tax checklist for the monthly close

The return is only as good as the sales report behind it. Ask for the reports at the start of the close, in the same request as the bank statements, so the tie-out does not wait. The month-end close checklist shows where this step sits in the close.

California’s tax agency gives a useful baseline: keep documents of original entry, such as invoices, receipts and purchase orders, plus every schedule and working paper used to prepare the return (California CDTFA, Publication 116: Types of Records). Most states ask for the same kind of evidence.

Start with gross sales. Compare sales on the tax report to revenue in the books for the month, and explain each difference, such as shipping, non-taxable services or timing.

Then move to the liability. Sales tax payable is the balance sheet account holding tax collected from customers and not yet paid to the state. Tax collected per the report should match the credits posted to that account for the month.

Marketplace sales need their own line. A marketplace facilitator is a marketplace that collects and pays the tax on sales it handles for third-party sellers. Those sales may still need to be reported, depending on the state, but the client does not pay that tax again.

1. Match gross sales on the tax report to revenue in the ledger.
2. Split out sales made through a marketplace facilitator.
3. Check the return’s breakdown by city, county and district against the sales report.
4. Match tax collected to the month’s credits in sales tax payable.
5. Subtract tax refunded to customers on returns in the month.
6. Confirm each exempt sale has a certificate on file.

An exempt sale with no certificate behind it becomes a taxable sale in an audit. Keep a certificate file by customer, and chase the missing ones before the month closes, not when an auditor asks.

The other side is purchases. Use tax is the tax a buyer owes on a taxable item bought without sales tax, such as equipment from an out-of-state seller. California asks sellers to keep the total purchase price and receipts for items bought for resale, lease or their own use (California CDTFA, Publication 116: Types of Records). Review untaxed invoices each month and accrue what is owed.

Each state assigns a filing frequency. Texas, for example, tells each permit holder by letter whether it files monthly or quarterly, and monthly reports are due on the 20th of the following month (Texas Comptroller, Sales and Use Tax). Check each client state’s site for its own schedule.

Record the payment against sales tax payable. After payment, the balance should equal only tax for periods not yet due.

Archive the return, the payment confirmation, the sales report and the certificates together. California says to keep required records for at least four years unless the agency authorizes earlier destruction in writing (California CDTFA, Publication 116: Retaining Records). Other states set their own periods, so follow the longest rule among the client’s states.

A sales tax audit tests the same tie-out, one period at a time, over several years. The auditor compares each return with the ledger and the sales reports, then asks for the certificate behind every sale billed without tax.

California’s rule shows why the monthly archive matters: if you are being audited, keep all records for the audit period until the audit is complete, even past the usual four years (California CDTFA, Publication 116: Retaining Records). Other states have similar rules, so never purge a period that is under review.

Prepare a short audit file for each state. It should hold, for example, the returns filed, a return-to-ledger reconciliation for each period, the certificate file by customer and the use tax accruals.

A client can owe tax in a state where it has no office. In South Dakota v. Wayfair, the Supreme Court reviewed a law that covered sellers delivering more than $100,000 of goods or services into the state, or 200 or more separate transactions, in a year (South Dakota v. Wayfair, Inc. (2018)). The Court let states require such remote sellers to collect.

States set their own thresholds today. Keep a running total of sales and transactions by state each month and flag any state getting close. Ask the client each quarter about new warehouses, staff or trade shows in other states, since those can create a duty to collect too.

• California CDTFA, Publication 116: Types of Records: Sellers keep books of account, documents of original entry such as invoices and receipts, return working papers, and purchase records for items bought for resale or own use.
• California CDTFA, Publication 116: Retaining Records: Keep required records for at least four years unless the agency gives written authorization to destroy them sooner.
• Texas Comptroller, Sales and Use Tax: Permit holders are told by letter whether they file monthly or quarterly; monthly reports are due on the 20th of the following month.
• South Dakota v. Wayfair, Inc. (2018): The South Dakota law at issue covered sellers with more than $100,000 of sales or 200 or more transactions into the state a year; states may require such remote sellers to collect.