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Procurement (Credit) Cards in a Tax Audit- Good or Bad?

author photo of B.J. Pritchett

Every business I’ve ever visited as part of a Arkansas audit seems to stumble and fall as tax auditors review their procurement card (credit card) issues.

Why would a credit card statement become an audit target? Quite simply - records! Where is the receipt showing tax was paid at the time of purchase? Without the receipt to identify the transaction and prove whether tax was properly charged or not, procurement (or credit) card transactions can trigger somewhat of a field day for tax auditors.

Written evidence is the key under tax audits – but it’s important to remember that the burden of proof is on you - the taxpayer. If there is no receipt, and only the credit card statement exists, the tax auditor will list every item on the credit card statement for review. Additionally, if a credit card receipt is available, but the seller did not bother to separately state the tax due on the transaction (and instead simply indicated the “total”) such transactions will also be listed for review.

For this reason, it’s imperative that all personnel assigned a procurement (or credit) card be responsible for collecting and keeping detailed receipts. An easy solution is to list every transaction made during the month on an excel spreadsheet and to then securely attach those receipts to the spreadsheet and credit card statement – and file for future reference. Done!

So, if you are wondering if procurement cards are a good or bad thing in a sales/use tax audit? Well… as long as you have all the receipts, it is good. If you do not have any receipts, unfortunately, it can be very, very bad.

Last tip regarding procurement cards – never ever allow an auditor to project procurement cards as a sample. This issue should be separately assessed as every month is different.

Your questions or comments regarding this (or other Arkansas business tax issues) are invited. See below for contact options.

About the Author: B.J. Pritchett, CMI, is the owner of Pritchett Sales & Use Tax Consulting and the Arkansas Sales and Use Tax School based in Hot Springs National Park, Arkansas. Learn more about her by visiting her author bio page.

Comments or questions may be submitted by using the on-page "Comment" feature, subject to disclaimer at bottom of page. Additional contact options (and Consultation Requests) are also available on B.J.'s associated Firm Profile page.

Other recent “Arkansas (AR)” posts by B.J. Pritchett, CMI:

NOTE: All blog content, comments, and participation subject to disclaimer at bottom of page.

Comments

5 Responses to Procurement (Credit) Cards in a Tax Audit- Good or Bad?

  • Posted by Estine on October 11, 2018 6:20am:

    Inter company invoicing. We have three shops within our company, wood, metal and machine shop. Our machine shop sharpens saw blades, re-tips, makes knives and sharpens drill bits that are used in our other shops. The machine shop also sells to the public. Sometime ago in an effort to keep track of the cost of the work done on the internal shops, we decided to do sales invoices for the services and materials, between these shops. These invoices were reversed at month end with a journal entry. No sales tax were invoiced. We are set to be audited by the State of Arkansas and we would like to know if we will have issues with this having been handled in this manner.

    • Posted by Author photo of B.J. Pritchettbjpritchett on October 11, 2018 7:54am:

      When you state inter-company invoicing are you looking at the same Federal Identification Number for all three shops? If so, then as long as you paid tax on the materials when first purchased, you should be okay under audit. If you did not pay sales tax on the initial purchase of the materials, this is where the state of Arkansas will get you.

      If all three shops have three different Federal Identification numbers, then the invoices you produced for each sale to each entity should have had sales tax included on the invoice.

      If you need assistance with your Arkansas audit, please contact me at b.pritchett@sbcglobal.net

  • Posted by Sarah on February 23, 2018 8:32am:

    We have a small business and will sometimes for different reasons perform a service at no cost to the customer. We create and invoice showing parts and labor but zero out the cost so that the customer gets a zero dollar invoice. Is this the correct way to handle these?

    • Posted by Author photo of B.J. Pritchettbjpritchett on February 23, 2018 9:38am:

      That way is fine but also write in "Service Performed Pro Bono" - FREE.

      Even though you have a Zero on the invoice - the auditors would see labor and material costs and try to sock it to you on Sales Tax side. Pay tax on your materials and IF the service would have been subject to tax - then - pay tax on the materials at your cost as a "Withdrawal from Stock".

  • Posted by Dan on November 10, 2017 8:46am:

    Good advice B.J. PCards are becoming a bigger target for audit and they can really jump up and bite you in the you know what if receipts are lacking. It's also a good idea to have some sort of tax accrual on these items, even if it is on a percentage basis. Do not assume that all PCARD invoices have tax on them!

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