Washington State Department of Revenue
Audit of Excise Taxes
By Sue Price-Scott, CPA
etail sales tax is the
State of Washington’s
principal source of
income. Businesses making retail
sales in Washington are required to
collect and remit sales tax on sales
of goods and services to the state.
The seller is responsible for
remitting the tax whether or not
collected.
Use tax is similar to sales tax. It
applies to purchases by a business
located in Washington where there
is no requirement to, or the
business failed to, collect the tax on
the sale. Most out of state vendors
or service providers having no
business presence in Washington
are not required to collect sales tax
for sales to Washington residents or
businesses.
Businesses often
overlook reporting out of state
purchases on their excise tax return
and paying applicable use tax.
Whether sales or use tax is
applicable, the party making the
purchase is responsible for paying
the tax. What many don’t realize is
that where the retailer or service
provider fails to assess and collect
applicable sales tax, the purchaser is
still responsible for paying it.
Businesses that make a purchase for
resale must provide a reseller
permit to the seller, otherwise the
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seller must charge the buyer retail
sales tax on the total purchase.
Washington
business
and
occupation tax (B&O) is a gross
receipts tax that is assessed on the
revenue of a business. There are
specific exemptions but most
businesses pay B&O tax on revenue
for sales or services provided within
Washington
State.
Unlike
businesses in states with an income
tax, B&O tax applies whether or not
a business is profitable.
Sales, use, and B&O tax are
reported on Washington State
Excise tax returns that are filed
monthly, quarterly or annually.
Sales taxes collected are considered
trust funds. If a business does not
remit collected sales taxes or closes
without remitting collected sales
taxes to the DOR, individuals
responsible for making the financial
decisions for the business may be
held personally liable for payment
of the unremitted taxes. Individuals
responsible may include officers,
bookkeepers, accountants, or any
person who made the decision not
to remit the taxes.
As with income tax audits, we
advise taxpayers to engage us or
another experienced professional
for representation and handling of
the audit. The professional will
prepare a power of attorney (POA)
1
for signature by an authorized
individual of the business. The
completed POA is provided to the
Washington
Department
of
Revenue
Auditor
who
then
establishes contact to begin the
audit.
When the DOR audits a business
and finds that sales or use tax was
not properly assessed and collected,
it will assess the tax with interest
and possibly penalties. The DOR
may then possibly audit the
business that was the other party to
the transaction and assess and
collect the tax. The tax that should
have been paid by one business
ends up being paid by both
businesses. How can that be? Well,
the seller is responsible for
assessing and collecting sales tax,
and the buyer is responsible for
paying the tax even if not collected
by the seller.
To have required documentation in
the
event
of
audit,
keep
documentation of returns and
records for at least the general
statute of limitation period, which is
5 years for excise tax returns filed.
Preparation for a DOR audit is best
handled by proactively performing
an annual self-audit. The following
steps should help streamline the
process:
Washington State Department of Revenue
Audit of Excise Taxes (cont.)
1.
2.
3.
4.
Reconcile revenue for the
year from the Company’s
books to the excise tax
returns filed. Investigate
and explain differences
(for example business
conducted outside of
Washington State). Keep
the reconciliation for
documentation.
Double
check
the
applicable tax rates. For
questionable
classifications,
either
contact a professional or
research DOR’s website.
Document your research
and conclusions.
For wholesale sales, verify
customers’ reseller permit
information using DOR’s
online tools.
Keep
documentation
of
verification for five years.
(Sellers have 120 days
from the sale date to
obtain documentation of a
reseller’s permit.)
Obtain the Company’s
depreciation schedule and
verify that current year
additions are listed and
total asset categories
reconcile
to
the
Company’s books. Review
invoices for each addition
and
make
certain
applicable sales or use tax
has been reported. Many
times use tax applicable to
purchases of assets for
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8.
Company use made via
credit card from an out of
state
Company
is
overlooked. Another area
of omission is on a bulk
purchase of assets from
another business via a
written contract rather
than an invoice; sales or
use tax still applies.
5. Obtain invoices for repairs
and maintenance and
perform the same steps as
in #4 above.
6. Obtain records of credit
card purchases and make
certain supporting invoices
are on file and applicable
sales or use tax has been
reported.
7. For vehicle purchases,
ensure
that
documentation of the
payment of sales tax is on
file. While that should be
identified in procedure #4
above, instances have
occurred
where
an
individual buys a used
vehicle from a private
party, pays the sales tax
when transferring the title
to their name, but doesn’t
retain the documentation.
Don’t find yourself having
to paying the tax twice.
Provide the above information
to your income tax return
preparer and request that he
or she review the Excise Tax
returns and documentation in
2
conjunction with preparation
of the income tax returns for
the business.
Sue Price-Scott, CPA is a partner
at Alegria & Company and
specializes in business and
personal income tax and is
accredited in business valuation.
She can be reached at
[email protected]