Record keeping is one of the most important aspects of managing a business, particularly with compliance. Proper record keeping ensures that your business is up to date with tax laws, facilitates accurate reporting, and timely payments, and will become really handy if your business ever gets audited by any of the tax offices.
Key Records To Keep
Although this chart is not exhaustive of important records to retain, ensure you’re aware of what your team and your business needs to keep a record of.
Sales records | Invoices and receipts | These documents should include dates, customer information, description of goods or services sold, quantity, price and sales tax amount charged. |
Purchase records | Vendor invoices, purchase orders | These documents are typically invoices from suppliers and vendors for all purchases made for the business. This includes inventory, supplies, equipment, and other business expenses. |
Tax exemption certificates | Customer exemptions, vendor exemptions | If you sell to tax-exempt customers (such as non-profit organizations or government entities), keep copies of their exemption certificates on file.
Exemption certificates from suppliers if you purchase items tax-free for resale or other exempt purposes |
Sales tax returns and filings | Filed returns, payment records | Keep copies of all sales tax returns filed with state and local tax authorities. This includes both paper and electronic filings.
Maintain proof of sales tax payments made, such as bank statements, canceled checks, or confirmation receipts from electronic payments. |
Accounting records | General ledger and any subsidiary ledgers | Your general ledger accurately reflects sales, purchases, and sales tax collected and paid. The ledger should be updated regularly to reflect all financial transactions. |
Supporting documentation | Contracts, agreements, shipping and delivery records | Copies of contracts and agreements related to sales and purchases, as they may be required to substantiate transactions. |
Best Practices
Organization | Organize records in a system that makes sense to you and your team. This system should be easy to navigate, secure, and easily available for search when necessary. |
Mode | Store electronic and physical copies of records in a secure, backed-up system. Consider scanning important paper documents to create digital backups. |
Retention | Retention periods vary. As a general rule, retain sales tax records for at least 3 to 7 years, depending on state requirements. Some states may require longer retention periods, especially if there are ongoing audits or disputes. |
Backup | Conduct regular internal audits to ensure that records are accurate, complete, and up-to-date. This helps identify and correct discrepancies before they become significant issues. |
Consistency | Ensure that your record-keeping practices are consistent and follow a standardized format. |
Effective record keeping is crucial for businesses to manage sales tax compliance with efficiency. By maintaining detailed and organized records, you can ensure accuracy, facilitate document availability, and avoid potential penalties.