Tips on State Compliance Regarding Invoice and Expense Reporting Documentation

In the first part of our two-part blog series on document retention that we are collaborating on with our accounting firm partner Brown Smith Wallace (BSW), we examined the information reviewed by the IRS on invoices and employee expense reports to help business owners be prepared in case they are audited. In Part 2, BSW will help us provide you with an even deeper layer of preparation by breaking down what is required with these documents at the state level.  

Differences Between State and IRS Requirements

While the requirements at the state and federal levels are similar, the document retention periods can differ.

“The records and returns filed are different between federal and the various states,” explains Ann Janoski, Tax Manager at BSW. “Therefore, the information that needs to be retained will differ depending on what needs to be substantiated. Records to support state sales and use tax would not necessarily be relevant for federal expenses or at the detail level required by the state.”

State Sales and Use Tax Audits

While the information required by most states is similar to what the IRS demands, you should refer to your state’s regulations that govern the assessment of sales and use tax to determine in what situation and on which transactions you must collect and pay the tax. According to BSW, the following sales and use tax information would generally be requested when undergoing an audit:

• Copies of all sales/invoice transactions showing the nature of the item sold and if sales tax was calculated and collected.
• Copies of all purchase invoices showing the detail of items purchased and sales tax paid.
• Copies of all customer exemption certificates for those customers claiming exemption status for collecting sales tax.
• Copies of your exemption certificates or claims of exemption status that you have supplied vendors that allowed you to be exempt from sales tax on a transaction. If you did not pay sales tax on an item you will need to be able to prove why.
• Property and equipment detail, such as fixed asset depreciation schedules and supporting documentation for purchases and sales of items during the period of the examination to show whether you paid sales/use tax on purchases or collected sales tax on equipment sold.

These copies may be in electronic/scanned format as long as the information is readable, accessible and it can be verified that all information is included, such as by sequential numbering.

Expense Reporting Retention and Destruction Tips

We’ll conclude this two-part series with three salient tips from BSW regarding invoice and employee expense reporting retention and destruction:

1. Develop an appropriate written policy for your business and follow it. If records are to be destroyed after a certain time, make sure they are shredded or destroyed. Don’t forget about the records that you keep in scanned form as well. Not only will this save on storage space, but if you have not destroyed documents, they could be subject to IRS audit or subpoena for legal matters.
    
2. Determine what records are necessary and how long they need to be maintained. When trying to determine how long to keep a particular record, you need to determine what that record is used for by your business. If you have a better version or an electronic version of the same information, you could discard this item and retain the other. Some items may not be needed at all. Other records, such as organizational records, should be kept permanently.
    
3. The federal and state requirements can differ, so there are other reasons to keep records, such as for employment records and for legal purposes. That is why most suggested record retention policies start with seven years.

If you have any questions about document retention requirements at the state or federal levels, contact Ann Janoski at BSW at AJanoski@bswllc.com. If you would like to know more about how electronic documents can streamline your retention process, please contact us at info@DataServ.com.