A sales tax audit can turn into a difficult experience for any business, but even more so for a hospitality business. As sales taxes are considered to be trust fund taxes paid by the consumer, the state entrusts restaurants and other hospitality businesses with collecting and remitting that tax on behalf of the State. There can be significant penalties for non-compliance, in addition to having to pay taxes that should have been collected by the business but were not.
One major issue that arises in this context is record maintenance. As you can imagine, hospitality businesses that engage in a high volume of transactions, as well as cash sales, face these issues more than others. This includes restaurants, bars, taverns, hotels, night clubs, etc. If appropriate documentation is not maintained and/or provided to an auditor in the correct manner and format, the result can be catastrophic.
Many clients file their own sales tax returns and may even choose to represent themselves when faced with a tax audit. A common reaction is that sales tax collection is straightforward and routine. This may be a mistake, as sales tax auditors have numerous tools for computing estimated assessments using sampling methods that do not capture the full picture of the business’s activities and taxable sales. The result can be a substantial sales tax assessment with penalties and interest included. Once the assessment is issued, it’s generally difficult and costly to fight.
In one such instance, a state revenue department computed an estimated assessment against a restaurant. We assisted with reconciling the sales data and accounting for any inconsistencies in an efficient manner to alleviate any risk of exposure, saving our client significant money and stress. We also provided advice regarding the types of accounting and point-of-sale systems to incorporate in order to avoid a similar audit struggle in the future.