Sales Tax in the State of New Jersey
Before talking about a sales tax audit we’d like to give some background information about sales tax in the state of New Jersey.
You are only allowed to collect sales tax when you have registered the business with the state of New Jersey and are authorized to collect sales tax in the state. We will not discuss what are taxable sales and non-taxable sales here, as the determination is heavily based on the industry you are in and the specifics of your services and products; if you are curious about this information, it can be found on the State of New Jersey website.
New Jersey Tax Requirements
Once you are registered to collect sales tax in New Jersey, you are required to file sales tax quarterly with the state. You will provide the following information when you file:
- Total gross sales
- The non-taxable part of the sales
- The taxable part (the difference between the two above)
- Calculate how much sales tax you should have collected based on the taxable sales
- How much you actually collected
(Here is the tricky part - the state of New Jersey wants you to remit the higher of what you collected or what was calculated to be the sales tax. You don’t get to keep the extra if you over collected, and if you under collected, you still need to pay the calculated amount from your own pocket)
- The tax payments that have been remitted for the quarter
- Tax amount due for the outstanding balance
Everything mentioned above is reported in the good faith of the taxpayer. As long as the math works, and the payments made satisfy the tax liability, the taxpayer would be in a good place until they get audited.
If the state of New Jersey is on a mission to audit your sales tax filing, the responsibility is on you, the taxpayer, to provide the documentation that can back up the numbers on the sales tax information filed.
The General Ledger
The best way to show corroborate your sales tax filing is the General Ledger. The General Ledger report has all the transactions recorded for a certain period of time. If you have a set of accounting records for your business, you can generate a General Ledger report pretty quickly and easily.
All of your previous transactions recorded as sales will be compared to your gross sales reported in the audit process.
For nontaxable sales, you will need to provide records to show the service or products sold were not subject to sales tax and, therefore, no taxes were collected.
What You Can Do
If you don’t have a General Ledger, what can you do to prove your sales to the auditor?
- You can hire an accountant to create a set of books after the fact. When time is of the essence, the work may not get done within the desired time frame.
- You can provide the auditor with all your invoices with sequential invoice numbers. You will bear the risk of miss-reporting sales revenue if you didn’t review all the invoices when you filed sales tax the first time.
- You can provide the auditor with all your deposit slips. If any deposits were not sales, you will have to prove it. If you cannot prove the deposit was not from your customer, the auditor may impose sales tax on that.
- You can let the auditor use their own method to estimate your sales and then tax liability. We have seen the auditor taking the total of all the purchase payments and dividing it by a gross margin percentage to come up with an estimated sales number.
The results are usually not in the taxpayer’s favor.
Keep Your Books Audit Proof
Good and smart business owners would keep their books current and audit proof. This would entail timely checks that sales and sales tax have been balanced. Some ways to do this are, sales and sales tax collected are reconciled with incoming deposits, and non-sales deposits and non-taxable sales are properly documented.
Do not let the audits catch you off guard. Running a business is already stressful enough and can keep you awake at night. Don’t let an audit ruin your weeks or months.
We have assisted countless business owners with IRS or state audits. A byproduct of our accounting and tax services is audit-proofing your business for tax audits. The accounting records and documentation we process each month can provide solid backup for your tax filings.
Work with a Professional
If you have a business and are in the process of selecting a tax professional, we recommend you work with a professional with CPA credentials so that you and your business can be protected from losing vital data and overpaying taxes as a result. This happens very frequently and is something we have helped our clients with in the past. If you are looking to make the change but are intimidated by the process you can always reach out to our firm at email@example.com . We look forward to speaking with you and assisting you as you look to make the right decisions when it comes to your business.
HOW SCHWARTZ IS HELPING SOUTH JERSEY SMALL BUSINESS OWNERS
Navigating these legal changes and what it means for your small business in New Jersey can be one of the biggest challenges you face in the coming years. Fortunately, Schwartz & Associates is already familiar with relevant tax laws and regulations you need to comply with, including the impact of the Biden Administration's new tax proposals. The American Families Plan (AFP) and American Jobs Plan (AJP) will bring with them new taxes on businesses in the coming year, and Schwartz is prepared to ensure your South Jersey business is not only in compliance but maximizing its benefits.
Contact us for more insight into what these changes may mean for your business specifically and what we can do to ensure you're getting the most out of your deductions.