Reconciling differences between the gross receipts reported for franchise/income tax and sales/use tax purposes is one of the most common issues addressed in a field audit.
An auditor performs this reconciliation to identify errors that may have been made in reporting sales subject to sales tax, exemptions from sales tax, etc. The gross receipts on the franchise/income tax return should equal total sales on Form ST-12. If they don't match, the auditor is required to reconcile the difference and identify reasons for the differences. Many times, the difference does not impact tax liability. However, if the difference cannot be reconciled satisfactorily, the auditor may presume that taxable sales have been underreported.
In order to minimize the time it takes to complete the reconciliation, it's important that sellers report
all sales on Form ST-12, line 1, whether taxable or not. Nontaxable and exempt sales will be removed on lines 2 through 5 of Form ST-12. It's also important that the taxpayer inform the auditor of year-end adjusting journal entries affecting gross receipts or total sales.
Form ST-12 instructions state:
Line 1. Total Sales: Enter the total amount of all cash, credit, and conditional sales, including all sales tax charged. Include a) sales, licenses, leases, and rentals of taxable and exempt tangible personal property and services, and b) transportation charges collected from customers. Do not reduce the amount on this line for sales returns and allowances.
IMPORTANT: You must use the accrual method of accounting to report your sales, unless the Department of Revenue has a) determined that this method would cause you undue hardship, and b) given you written permission to use another method.
When gross receipts don't reconcile, an audit can be unnecessarily delayed. To avoid audit delays and adjustments,
all sales on Form ST-12, line 1.
November 23, 2010