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Tips to Avoid Sales Tax Problems from Accounting Journal Entries

Accounting records.jpgHere are common mistakes that manufacturers make with journal entry transactions that can result in underpayment of tax. Follow this sales and use tax advice to ensure accurate tax decisions.

1. Intercompany transactions
If assets are transferred from one division or subsidiary to another, this transfer may be viewed as a “sale” depending on the way your company is set up. Sales tax may need to be charged or use tax accrued. Even if the transfer is not considered to be a sale, it is important to also consider that the asset transferred may be taxable in the new jurisdiction where it is located.

2. Reclassifying items
An item may have been purchased under an exempt expense account (e.g. manufacturing exemptions) incorrectly. If a journal entry is used to change the item to the correct taxable account, chances are the necessary use tax accrual will be missed.

3. Pulling inventory out for company use
Make sure there is a process in place to ensure use tax accruals take place if inventory items are pulled out for a company’s own use. Also, remember to research what the tax basis is for the item that is pulled from inventory. Depending on the jurisdiction this may be the cost of the materials, fair market value or the jurisdiction may use another method to determine the tax basis.

Auditors look for these types of transactions when searching for underpayments. Follow two steps to help eliminate underpayments and minimize audit assessments.

Step 1: Review journal entries regularly – once a month or at least once a quarter to make sure sales tax is charged correctly.

Step 2: When mistakes are found—correct them, make good journal entries AND have the backup documentation to verify these changes.

For more tips and sales tax advice on improving your sales tax processes to minimize underpayments, check out this recorded webinar, Sales and Use Tax For Manufacturers:  11 Ways to Manage Sales & Use Tax Risks.

webinar - 11 ways manufacturers evaluate sales tax risk

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Crystal Wood, CMI
Written by Crystal Wood, CMI
Crystal is the Tax Manager at Windward Tax. She oversees a variety of sales and use tax projects such as overpayment reviews, process reviews and training seminars. Crystal's clients include large multi-national corporations as well as a variety of manufacturers.

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