Some Recordkeeping Tips

1. Determine the state that has jurisdiction over the transaction. This will control the statute of limitations, which controls how long you should keep records. For most states, it's three or four years. You'll need to prove where control was transferred, so you're going to want to hang on to sales paperwork, purchase orders, shipping records, bills of lading, etc.

Remember, there is NO statute of limitations protection if you've never filed a return in a given state.

2. If you didn't charge tax on a sale, you need to substantiate the reason.

• Make sure you have a well organized and complete file of exemption certificates. And have a procedure to demonstrate how you get them.
  
• If you didn't charge tax because the sale was shipped out of the state, do you have the necessary paperwork (see above)?
  
• If the sale wasn't taxable, do you have sufficient backup if you are questioned. Keep a file of your research so that, when the auditor challenges you, you can whup it out. We used to call this a CYA file. If you don't know what that acronym means, email me.

3. If you didn't pay tax on a purchase, you need to substantiate the reason.

• If you've determined that the purchase wasn't taxable, show the reason on the invoice. This is likely to be because of how you will use the purchase (resale, manufacturing, agriculture, research, etc.) You're going to have to prove that exemption. Can you?
• Do you have sufficient documentation for your decision about taxability. You know, the CYA file?
• And if you've paid the use tax, you need to document this as well. Hopefully, you've coded the invoice so that the fact that you've accrued the tax is obvious to the auditor, and all they have to do is trace the invoice back through your system to the return.
  
• See this article for an idea to help with the above bullet points.
• On a practical side, remember that, if you're stapling paperwork to an invoice, this stuff tends to fall off - particularly the bottom items. The invoice is a good place for transaction specific backup, but be careful.
  

A couple of more general items...

4. If you've gone through a system conversion, keep your old software and data if the newer system doesn't support the old one. You need to be able to provide the auditor with the information, even it presents a technical challenge. And make sure you keep sufficient hardware and documentation to be able to get at the data when you need it (this is a very common mistake).

5. If you acquire a company, make sure that the technology and skills remain intact to get at the records that come with the acquired company. People leave and their knowledge departs with them.

6. Finally, remember the fundamental concept. The audit won't be tomorrow. It'll be two or three years from now. You're never going to remember.