Based on our experience at Thompson Tax, we have found that businesses of all sizes—small, medium, and large—often lack a formal Sales and Use Tax Policy or Operations Manual. Sales and use tax compliance is a complex and constantly evolving aspect of taxation, with frequent regulatory updates and laws varying by jurisdiction. To stay compliant, companies must maintain accurate records and have clear justifications for their tax positions.
One highly effective yet simple tool for documenting tax procedures is a Memorandum (Memo). Unlike lengthy policies or detailed procedures, a well-crafted Memo provides a concise and practical reference for your company’s sales and use tax practices. A Memo outlining key sales and use tax procedures can be invaluable—especially when management or leadership requests clarification on an audit assessment. By proactively documenting tax processes and decision-making rationale, businesses can improve internal understanding, facilitate compliance, and be better prepared for audits.
Below, we explore the key benefits of using a Memo in sales and use tax matters within the Thompson Tax 10-step program.
Step One: Tax Decisions Documented
Is your sales and use tax filing position correct? Sales and use tax laws can be ambiguous, leading to varying interpretations. A Memo allows businesses to document their understanding and application of tax laws, serving as internal guidance for compliance. Clearly documenting tax decisions—such as exemption applicability or transaction taxability—establishes a reliable reference for tax professionals, auditors, and legal teams. It also supports consistency across sales, purchasing, and finance departments.
Step Two: Internal Training of all Departments is Critical
In larger organizations or businesses with multiple locations, different departments may interpret sales and use tax rules inconsistently. A Memo provides a standardized approach to tax compliance, ensuring all employees responsible for tax matters follow the same guidelines. It also serves as a valuable training tool for new employees, allowing them to understand past decisions and the company’s approach to tax compliance.
Step Three: Dealing with Vendor and Customer Inquiries
Businesses often receive inquiries from vendors and customers regarding the application of sales tax on transactions. A Memo on file allows companies to respond confidently and consistently to these questions. It ensures that all parties involved in a transaction are aligned on tax treatment, reducing disputes and potential liabilities arising from incorrect tax assessments.
Thompson Tax specializes in researching tax exemptions, evaluating supporting documentation, and drafting Memos that justify your claims. Our Memos are designed to address typical vendor and customer concerns, enabling your business to provide clear, defensible explanations regarding the tax treatment of transactions.
Step Four: Keeping up with Everchanging Tax Laws
The Memo can also assist in determining whether to file an amended return if a tax change was not properly reported. As noted before, sales and use tax laws continually evolve through new rulings, regulations, and court cases. Maintaining a Memo allows companies to track these changes and document adjustments to their compliance strategy—helping reduce the risk of non-compliance due to outdated practices.
Step Five: Tax Return Preparation and Related Compliance
Filing accurate sales and use tax returns is critical to avoiding audits and penalties. A Memo provides a detailed record of tax positions, ensuring that tax returns are completed correctly. This reduces the risk of errors and gives tax professionals greater confidence in the accuracy of reported tax liabilities. This also provides a roadmap to assist a prospective auditor on how your reporting system works.
Step Six: Communicating with Tax Authorities
In cases where businesses must engage with state tax authorities to clarify taxability issues, having a Memo provides a well-reasoned and structured argument. It allows businesses to communicate their tax positions effectively, showing that they have taken a thoughtful approach to compliance rather than making arbitrary tax decisions.
Step Seven: Audit Readiness, Success, and Penalty and Interest Reduction
Failure to comply with sales and use tax laws can result in significant penalties and interest. If a business is found to have underpaid sales tax, the financial consequences can be severe. A Memo provides evidence that the company acted in good faith, conducted thorough research, and reasonably complied with tax regulations. While this may not eliminate penalties, it can be a mitigating factor when negotiating with tax authorities.
Step Eight: Documentation! Documentation! Documentation!
Unlike income tax, which is substance-driven, sales and use tax is form-driven. If you do not have the proper forms, you have a taxable transaction.
Many businesses rely on sales tax exemptions for specific purchases or sales transactions. However, exemption laws can be complex and require proper substantiation. A Memo can document the legal basis for claiming exemptions, helping businesses justify their tax positions if questioned by tax authorities. This documentation, along with the proper resale or exemption certificate, can be particularly useful when dealing with resale, manufacturing, and interstate commerce exemptions.
Step Nine: Due Diligence
A primary concern when facilitating Mergers & Acquisitions (M&As) and other structural changes is that oftentimes, the seller and buyer may take different tax positions, which need to be resolved before closing. Tax due diligence is a key component of the process. A well-documented Memo outlining the company’s sales and use tax compliance efforts can reassure potential buyers or investors that proactive steps have been taken to identify and mitigate tax risks. This can help facilitate smoother transactions and prevent unexpected tax liabilities from surfacing post-acquisition.
Step Ten: Contact Thompson Tax, Your Go-To Expert for Sales & Use Tax Memos
At Thompson Tax, we proactively structure Memos that protect your job and enhance your career. We ensure your Memo is comprehensive and legally sound, providing a strong foundation for sales and use tax compliance. Our tax professionals thoroughly analyze your transactions, research applicable tax laws, and draft clear, authoritative documentation to support your tax positions.
Our expertise extends to creating internal tax manuals, making it easier for your teams to apply consistent sales and use tax practices across all operations. Additionally, we offer training sessions to ensure employees fully understand the tax positions outlined in your Memo, fostering a culture of compliance within your organization.
With Thompson Tax as your Trusted Tax Advisor, you gain a strategic partner dedicated to safeguarding your business against compliance risks while streamlining your tax operations. Let us help you stay ahead of sales and use tax challenges with confidence!
Contact the Thompson Tax Team today!