What Services Are Taxable In Texas – The main purpose of the sales tax audit is to confirm that the taxpayer has reported the correct amount of tax. Historical sales tax reported amounts should be analyzed when examining the taxpayer’s records.
Nexus is the representative establishment in the State of Texas that makes a taxpayer responsible for collecting sales or use tax. The Due Process Clause of the United States Constitution requires some definite link, some minimal connection between the state and the person, property, or transaction it seeks to tax. This link, called representation, is determined to be sufficient through a derived benefit analysis. The analysis indicates whether the taxpayer received any economic gain or advantage from its association with the State.
What Services Are Taxable In Texas
Under Section 151.107 of the Texas Sales, Excise, and Use Tax Act and Sales and Use Tax Rule 3.286, Responsibilities of Seller and Buyer, a retailer has an establishment or does business in Texas if the seller:
Are Services Taxable In Texas?
Once agency/nexus has been established, an out-of-state seller remains legally required to collect sales tax on sales made in Texas for a 12-month period after the seller ceases to conduct business in Texas.
Although the “Deductions” category does not appear on the sales tax return, this amount is calculated by the computer and appears in the Audit History.
The audit procedures used in each audit situation will be adapted to the accounting and registration system of the individual taxpayer. Because taxpayers use different reporting methods to complete their sales tax returns, it is important for the auditor to understand the method used by the taxpayer. The auditor must perform an analysis of the accounting system and develop specific audit procedures applicable to the audit. Certain procedures must be carried out in each and every audit:
During the intake conference, the taxpayer or the taxpayer’s representative must explain the reporting method used. Ask open-ended questions to get an overview of the entire business operation and also identify likely problem areas of tax liability or credit. Consider the following areas:
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When the taxpayer uses this method, the reported gross sales will usually be incorrect and generally should not be used for projections. If the reported gross sales and net deductions adjustments are zero, no adjustments should be made.
The corresponding amounts would be indicated in the monthly sales tax return using the “support in” Taxable sales are:
When supporting reported taxable sales, any difference between book taxable sales and reported taxable sales should be analyzed.
The taxpayer’s internal control system must be analyzed and evaluated to determine the reliability of the records being examined. The depth of the audit examination is largely determined by the reliability of the taxpayer’s internal control system.
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Listed below are some characteristics of good internal control. Each system must be analyzed for specific strengths and weaknesses.
Total sales consist of all taxable and non-taxable sales during the reporting period for each outlet. Taxable and non-taxable sales include:
A sales reconciliation must be performed by comparing reported sales, according to the sales tax return, with audited sales, by books and records. This reconciliation can be completed by reporting period or by year.
Any differences found between reported and audited sales should be analyzed in light of the taxpayer’s reporting method. Determine whether the differences result from taxable or nontaxable sales. Audit adjustments for unreported taxable sales should be made and included in an “Adjustments to Gross Sales” examination.
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Preliminary reviews (short tests) should be done before a thorough examination of the records. Brief tests will provide the information needed to determine whether detailed or sample audit procedures should be performed. Short tests highlight key areas that may need further examination. Before relying on taxpayer records, perform brief tests of the following:
Document the steps and conclusions of the short tests in the Audit Plan. If the short tests reveal that the summary records accurately reflect the taxpayer’s method of accounting, then use the taxpayer’s summary records. If not, it may be necessary to examine the original document.
REMINDER: Short tests are not used to reconcile reported totals, only to reconcile the steps used to arrive at those totals.
Examine general ledger accounts for debits and credits that may represent unreported taxable sales or services, such as:
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Consider all data relating to general journal entries to determine whether an entry represents an unreported taxable sale or service. This data may include:
Examine cash receipts records to determine whether cash sales receipts have been credited to the appropriate sales or revenue accounts. Be careful not to duplicate taxable sales or services found in other records.
Examine the accounts receivable of owners, partners, officers, or employees of a business for evidence of taxable sales or services not otherwise recorded in the sales or revenue accounts. Review partner drawing accounts and employee advance accounts.
Purchases journal entries can be made for sales at cost or returned merchandise. Inventory withdrawals that should have been reflected in the inventory accounts may also appear as credits in the purchases journal. Browse these posts for taxable sales or services.
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Sales invoices are source documents and typically represent the original record of a transaction. It is a necessary part of the audit procedure to examine a representative number of these invoices to determine:
NOTE: Many taxpayers have multiple sets of invoices. For example, one set of sales invoices may be filed in numerical form while another set may be filed in customer folders.
Tracking sales invoice postings is the first step in verifying the accuracy of the original entry books. The sales invoice tracks directly to the sales or revenue journal for posting accuracy regarding amount and classification. Trace source documents to summary records and check for errors and omissions.
The tax charged on the invoice is important because the tax accrual account is based on the tax rate multiplied by the taxable value. This is especially important in audits of taxpayers who obtain total sales, taxable sales, or deductions based on the amount of tax accrued.
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Be aware of what type of deductions the taxpayer is claiming because they may result in itemizing certain accounts. Ensure that the taxpayer is in possession of all required resale, exemption and direct payment exemption certificates.
For sales of tangible personal property or taxable services, examine invoices to determine whether charges are consistently itemized or billed as a lump sum. It is also important to know this information when examining purchases.
If there is a lump sum charge that includes both taxable and non-taxable amounts, the entire charge is taxable. To be excluded from the taxable base, non-taxable items must be listed separately on the invoice or other billing document.
A comparison of sales reported for federal income tax purposes with state sales and use tax returns is good auditing practice. This may not be feasible if the taxpayer files a consolidated federal income tax return. However, the taxpayer must have working papers showing how these figures were obtained.
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Reconcile differences if a taxpayer has acceptable records, but the gross receipts recorded on the books and reported on the sales and use tax returns do not agree with the gross receipts on the federal income tax returns. Material differences must be analyzed. Determine whether the difference is the result of taxable or nontaxable sales. Also review Schedule D of your federal income tax return for sales of fixed assets.
Sales tax collected against sales tax reported must be reconciled in detail for each audit. Gross sales must not include sales tax collected, but:
Add total taxable sales (tax excluded) and tax-exempt sales to get a gross sales figure. See the following Example. Compare the Gross Sales figure with the amount shown on the tax return.
The Bar-B-Q restaurant is located within the city limits of a taxing city and within a taxing MTA (total tax rate is 8.25%). The total amount of the sales tickets is entered in the cash receipts journal. The restaurant occasionally serves church functions, and these exempt sales are recorded in the cash receipts journal. The figures for a cash receipts journal show:
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Verify the tax accrual account (also called the tax payable account) by comparing the tax accrued with the taxes reported during 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:
During the course of an audit, a tax reconciliation is usually performed for the audit period. However, where refunds or credits were allowed in an audit or refund period, the tax reconciliation must be extended to include the most current report submitted. This process is necessary to verify that the return or credit has not been made in subsequent reporting periods.
Verification of deductions is an important area of an audit. Although not specifically reported by the taxpayer, deductions are the difference between gross sales and taxable sales.
Normally, the review and reconciliation of Deductions is done at the same time as that of Gross Sales. Whenever feasible, adapt the audit procedure to the method used by
Texas Sales Tax, In A Nutshell
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