What Internal Auditors Need to Know About Sales Tax

September 7, 2015

How can internal auditors help their institution comply with sales tax laws? The first step is to become aware of the tax law. Unless you live in one of the five states that do not have a statewide sales tax, a simple question that should be a part of every departmental audit is, “Do you sell anything?” If the answer is yes, take that information to your business and finance department, specifically to the controller or the vice president of business and finance. It is important to verify that the department is correctly reporting the sales tax collected to the business and finance department. That department has the responsibility for preparing and filing the state sales tax return. You will be able to help them identify a source of potential sales tax liability.

You may have to overcome some widely held myths about sales tax.

You may have to overcome some widely held myths about sales tax. One is “We’re a taxexempt organization, and we don’t have to charge sales tax.” Another myth is “We only sell to students, so we don’t have to collect sales tax.” Students are not exempt from paying sales tax. If the university sold an item, they have the responsibility to collect and remit the sales tax to the state. Another myth is “All the money we make, we give to a scholarship fund.” The state does not care about the university’s use of the funds; the state cares about the sales tax being charged and paid over to the state.

Sales tax laws vary widely from state to state. For instance, food in some states is not subject to sales tax. In others, carbonated beverages are subject to sales tax: however, if a soft drink is purchased with a meal, the drink is considered an insignificant part of the meal and is not taxed. Purchased separately, the drink would be subject to sales tax. In one state, a fruit drink is subject to sales tax if it is less than 50 percent real fruit juice. In another state, licorice sold is not subject to sales tax as most candy is because it is a flour-based product and not classified as a candy. In one state, shipping and handling charges are subject to sales tax.

It is important to ensure that sales tax collected is not recorded as revenue. There should be a separate sales tax liability account into which the collected sales tax funds are deposited. Sales tax collected is not the university’s money. It is collected in trust by the university for deposit with the state to fulfill the reporting requirements of sales tax law.

If a department has sales that are exempt from the sales tax, ask to see the sales tax exemption certificate.

If a department has sales that are exempt from the sales tax, ask to see the sales tax exemption certificate. This certificate should be retained for four years. Note, a federal ID number is not a sales tax exemption certificate. Most states issue a document explaining that the purchasing organization is not to be charged sales tax. In some states, this may be another state institution, and in other states, this exemption from sales tax may only apply to a 501(c)(3) organization.

Sales tax law changes frequently. The changes are not always effective on January 1 of each year as states and local municipalities may hold “special” elections to change the rate of sales tax. There are also sales tax holidays during certain periods of the year. It’s important for the person responsible for the sales tax return to be aware of changes and holidays.

Training for persons with sales tax filing responsibilities should be emphasized. It is important that they receive their sales tax information from a reliable source.

Forming a “Tax Team” with your tax manager at your institution can be beneficial. A quarterly meeting with the business and finance department can reveal new activities on campus that may have tax consequences.

The simple question of “Do you sell anything, including on the Internet?” goes a long way to identifying sales tax exposure. States are looking to increase their revenue and believe noncompliance with state sales tax law is high.

Sales tax obligations sometimes just “happen” on campus with departments often taking actions without being fully informed of the liability for sales tax. Did your sports team go to a bowl game where the band sold CDs? Did your education department go to a conference and sell books? Both of these result in sales tax becoming due to the state in which the items were sold. A vendor’s license may also be required to sell in the other state as well as in your home state.

About the Author

Steven W. Hoffman

Steven W. Hoffman, is a tax professional with many years of experience and education and is dedicated to providing education and consulting on taxes to colleges, universities and nonprofit organizations. His experience includes 15 years with the IRS and subsequently has held tax related positions with multiple universities including, George Washington University and The Ohio State University. Steve is editor and publisher of the Tax Update Newsletter for Higher Education, has earned his membership in the National Speakers. Known as the The Tax Translator, he makes tax law easily understood and has been called ‘Tax with Personality’.

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