Understanding the significance of sales tax reconciliation
The sales tax reconciliation report may seem like a redundant and insignificant process in the age of automated finances and digital business activities. But its significance is just as vital today as it was in eras past, and maybe even more so, as it safeguards businesses against fraud and malpractice in the simplest, and most reliable ways.
Increased compliance assurance
It ensures compliance with tax regulations by verifying that the sales tax collected and recorded aligns with the amount that should be remitted to the tax authorities.
Assurance in accuracy
It helps maintain the accuracy of financial records by identifying any discrepancies between recorded sales tax liabilities and actual amounts owed.
Transparent audit trails
Reconciliation provides a clear trail of sales tax remittances, which is essential in the event of a tax audit.
Reliable financial reporting
It aids in accurate financial reporting by ensuring that sales tax liabilities are properly accounted for and reflected in the financial statements.
Improved risk management
By reconciling sales tax accounts, businesses can mitigate the risk of errors and potential penalties for underpayment of sales tax.
The 10-step sales tax reconciliation process
While sales tax reconciliation format may differ slightly in each state, the basic steps involved in the process are the same wherever you go.
Here are the 10 primary steps on how to do sales tax reconciliation:
Step 1: Gather Sales Records
Begin by collecting all sales records for the period you are reconciling. This includes all invoices, receipts, and any other documents that record sales transactions and the sales tax collected.
Step 2: Summarize Total Sales and Tax Collected
Calculate the total amount of sales and the total amount of sales tax collected during the period. This will give you the gross sales and the total sales tax liability.
Step 3: Gather Purchase Records
Collect records of all purchases made during the period, focusing on those where sales tax was paid. This is necessary for businesses that can claim a credit for tax paid on purchases.
Step 4: Calculate Total Taxable Sales
Determine the total taxable sales. This might involve separating taxable from non-taxable sales if your business deals with both.
Step 5: Review Sales Tax Returns
If you have already filed sales tax returns for the period, review them. Ensure that the figures reported match the sales records and calculations you have.
Step 6: Reconcile Collected Tax with Returns
Compare the total sales tax collected (from step 2) with the amount reported and remitted in your sales tax returns. The two figures should match. Any discrepancy needs to be investigated.
Step 7: Investigate Discrepancies
If there are discrepancies, thoroughly review your records to find the source of the mismatch. This might be due to data entry errors, misclassification of taxable and non-taxable sales, or other accounting mistakes.
Step 8: Adjust for Over or Underpayment
If you’ve collected more tax than you’ve remitted, you’ll need to pay the difference to the tax authority. Conversely, if you’ve remitted more than you collected, you may be due a refund or credit.
Step 9: Update Accounting Records
After reconciliation, update your accounting records to reflect the accurate sales tax liability. This ensures that your financial statements are accurate.
Step 10: Document the Process
Keep detailed records of the reconciliation process, including how discrepancies were resolved. This documentation is crucial for audits and future reference.
Following these steps, it’s important for businesses to use the discoveries of the reconciliation to plan for the future and ensure that processes are strengthened to avoid any future mishaps.
Overcoming the common challenges of accurate sales tax reconciliation
As simple as reconciliation may seem, it holds a number of challenges that businesses need to overcome for the process to be effective and valuable.
Navigating nexus and complex tax regulations
Companies with multiple nexus, who have to adhere to the sales tax regulations of multiple jurisdictions may have a tough time of reconciling data and siloing state-specific data
Reconciling accurate transaction and sales tax collection data
Accurate reconciliation relies on the accuracy of transaction data and up-to-date recordkeeping, without which the reconciliation serves no purpose.
Keeping up with changes in tax laws and requirements
The ever-changing sales and use tax landscape and make it challenging for even the most sophisticated companies to stay fully compliant.
Overcome these challenges and be assured of an accurate sales tax reconciliation each time with Complyt. Get a free demo today to see how we simplify the journey to airtight compliance.