Hard lesson on the importance of recording sales tax

by Skip Oliva January 13, 2015

sales tax record keeping

sales tax record keeping

Courts don’t listen to excuses when it comes to sloppy sales tax record keeping.

All businesses responsible for collecting sales tax must keep proper records. Tax authorities will not accept incomplete or inaccurate accounts. And judges will not listen to excuses.

These things are usually taken as a given, but sometimes we see a reminder of just how dearly it can cost a company if proper record keeping isn’t a priority.

Here is a recent example from New Jersey. This case involves a one-man company that went out of business in 2006. The proprietor remodeled residential bathrooms and kitchens. By his own admission, he “was not an excellent bookkeeper” and failed to keep complete business records.

This proved problematic when, in 2005, an auditor from the New Jersey Division of Taxation informed the proprietor she would audit his books to review, among other things, whether he properly collected and remitted sales taxes to the state. (The proprietor had not filed any sales tax returns from 2001 to 2005.) The proprietor referred the auditor to his accountant. But she subsequently learned the accountant had no business records for the proprietor’s company. Indeed, the accountant had made several unsuccessful attempts to obtain basic financial information from the proprietor, to no avail.

Aside from “some bank statements,” the proprietor was unable to provide any documentation of his business to the auditor. The auditor therefore issued an “arbitrary assessment” to determine the proprietor’s unpaid sales tax liability. The proprietor filed a protest.

In New Jersey, a Division official known as a “conferee” hears tax protests. Here, because of the lack of complete records, the conferee decided to take the quarter with the most available information and use that as a baseline to reconstruct the proprietor’s sales for the other quarters. In other words, the sample period invoices showed about 87% of the proprietor’s sales were subject to sales tax; the conferee therefore applied that same percentage to the other quarters’ sales. This resulted in a sales tax liability of about $76,000.

The proprietor appealed that determination to New Jersey’s Tax Court. But in a decision dated Dec. 23, 2014, Judge Joshua D. Novin upheld the assessment. Novin said a tax assessment is presumed correct unless the taxpayer can show the methodology was “plainly unreasonable.” That requires a taxpayer to “present detailed source records in order to refute” the conferee’s conclusions.

Obviously the proprietor could not do that in this case. Instead he challenged the conferee’s decision to use the sample period as a basis for assessing liability. But Novin said the conferee’s approach “was logical, sound and reasonable in light of the [proprietor’s] failure to maintain adequate records.”

S.M. Oliva is a writer living in Charlottesville, Virginia. He edits the international legal blog Bonham’s Cases.

Skip Oliva
Skip Oliva

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