Washington State Department of Revenue Audit of Excise Taxes
Retail sales tax is the State of Washington’s principal source of income. Businesses making retail sales in Washington are required to collect and remit sales tax on sales of goods and services to the state. The seller is responsible for remitting the tax whether or not collected.
Use tax is similar to sales tax. It applies to purchases by a business located in Washington where there is no requirement to, or the business failed to, collect the tax on the sale. Most out of state vendors or service providers having no business presence in Washington are not required to collect sales tax for sales to Washington residents or businesses. Businesses often overlook reporting out of state purchases on their excise tax return and paying applicable use tax.
Whether sales or use tax is applicable, the party making the purchase is responsible for paying the tax. What many don’t realize is that where the retailer or service provider fails to assess and collect applicable sales tax, the purchaser is still responsible for paying it.
Businesses that make a purchase for resale must provide a reseller permit to the seller, otherwise the seller must charge the buyer retail sales tax on the total purchase.
Washington business and occupation tax (B&O) is a gross receipts tax that is assessed on the revenue of a business. There are specific exemptions but most businesses pay B&O tax on revenue for sales or services provided within Washington State. Unlike businesses in states with an income tax, B&O tax applies whether or not a business is profitable.
Sales, use, and B&O tax are reported on Washington State Excise tax returns that are filed monthly, quarterly or annually. Sales taxes collected are considered trust funds. If a business does not remit collected sales taxes or closes without remitting collected sales taxes to the DOR, individuals responsible for making the financial decisions for the business may be held personally liable for payment of the unremitted taxes. Individuals responsible may include officers, bookkeepers, accountants, or any person who made the decision not to remit the taxes.
As with income tax audits, we advise taxpayers to engage us or another experienced professional for representation and handling of the audit. The professional will prepare a power of attorney (POA) for signature by an authorized individual of the business. The completed POA is provided to the Washington Department of Revenue Auditor who then establishes contact to begin the audit.
When the DOR audits a business and finds that sales or use tax was not properly assessed and collected, it will assess the tax with interest and possibly penalties. The DOR may then possibly audit the business that was the other party to the transaction and assess and collect the tax. The tax that should have been paid by one business ends up being paid by both businesses. How can that be? Well, the seller is responsible for assessing and collecting sales tax, and the buyer is responsible for paying the tax even if not collected by the seller.
To have required documentation in the event of audit, keep documentation of returns and records for at least the general statute of limitation period, which is 5 years for excise tax returns filed.
Preparation for a DOR audit is best handled by proactively performing an annual self-audit. The following steps should help streamline the process:
1. Reconcile revenue for the year from the Company’s books to the excise tax returns filed. Investigate and explain differences (for example business conducted outside of Washington State). Keep the reconciliation for documentation.
2. Double check the applicable tax rates. For questionable classifications, either contact a professional or research DOR’s website. Document your research and conclusions.
3. For wholesale sales, verify customers’ reseller permit information using DOR’s online tools. Keep documentation of verification for five years. (Sellers have 120 days from the sale date to obtain documentation of a reseller’s permit.)
4. Obtain the Company’s depreciation schedule and verify that current year additions are listed and total asset categories reconcile to the Company’s books. Review invoices for each addition and make certain applicable sales or use tax has been reported. Many times use tax applicable to purchases of assets for
Company use made via credit card from an out of state Company is overlooked. Another area of omission is on a bulk purchase of assets from another business via a written contract rather than an invoice; sales or use tax still applies.
5. Obtain invoices for repairs and maintenance and perform the same steps as in #4 above.
6. Obtain records of credit card purchases and make certain supporting invoices are on file and applicable sales or use tax has been reported.
7. For vehicle purchases, ensure that documentation of the payment of sales tax is on file. While that should be identified in procedure #4 above, instances have occurred where an individual buys a used vehicle from a private party, pays the sales tax when transferring the title to their name, but doesn’t retain the documentation. Don’t find yourself having to paying the tax twice.
8. Provide the above information to your income tax return preparer and request that he or she review the Excise Tax returns and documentation in conjunction with preparation of the income tax returns for the business.
Sue Price-Scott, CPA is a partner at Alegria & Company and specializes in business and personal income tax and is accredited in business valuation. She can be reached at firstname.lastname@example.org