Pay When Paid Sales Tax

Some areas offer deferred sales tax payment plans. These plans base tax payments on the sales tax amounts the company has received payment for rather than the tax amount they have charged to their customers. This only affects businesses who maintain their own receivables (charge accounts). Program participation is limited in some areas to specific types of businesses and there may be an application process for such programs before participation is allowed. Rules and laws vary from area to area, so please check with your area's local tax department(s) to find out more specific information regarding any requirements.

Your business is responsible for ensuring that any tax reporting and payments are done properly and that sufficient information is retained in the event of an audit. Using a pay when paid program does make sales tax payment a more complicated process and requires more diligent record keeping by your business.

Typically, pay when paid plans have a time limit on how long tax may be deferred (usually one year from the transaction date). After this time period, any unpaid sales tax is due regardless of the payment status. Because all sales tax that has been charged is eventually due to be paid (even if your company never receives payment), there is some limit to the benefit provided by deferred tax plans. The main benefit is that tax payments can be more closely tied to your company's cash flow. When more payments are received toward receivables items, your company has more money to pay the sales tax, in other words.

How does the Software Handle Pay When Paid?

It's important to understand that to pay sales tax when your company receives payment, there has to be some way of knowing that this has happened and enough detail regarding each payment (tax amount, tax location, date of the transaction, etc.) to justify the taxes paid in the event of a sales tax audit. This requires effort and planning to do this properly and accurately. Balance-only accounts don't retain sufficient details for this kind of reporting.

The are limited functions built-in to the application and database to assist users with tracking sales tax payments for pay-when-paid tax reporting. Here is an important list of considerations and rules when choosing a pay-when-paid tax program:

1. All Receivables must be done as Open Item accounts to retain the details required for accurate tax reporting. Balance forward charge invoices are never marked as paid!

2. The tax paid on non-charge sales transactions is marked as paid immediately upon processing.

3. Use the Tax by Invoice report with selection criteria of By Paid Date to see the overall tax liability for a date range.
To view a particular tax location, select Tax Location with the date selection.
To view all tax locations for the period with sub-totals, choose By Paid Date with the desired dates and also specify a Sort By choice of Tax Location. You can also sort by branch location. If some locations are pay-when-paid eligible and some are not, back out any ineligible locations from the totals manually. For more about the Tax by Invoice report, see this topic.

4. For each tax period, remember to pay sales tax on any transactions older than the pay-when-paid program's expiration period (usually one year). This means that if your program's expiration is one year, you'd be required to pay any sales tax that had not been paid on invoices older than a year. This can be tricky because:

• Sales tax may still be paid on expired items in the future. If so, any expired invoice would still show up on the "Tax by Invoice" report at the time it's paid even if the tax had been previously paid (because it passed expiration). For this reason, after your company passes the expiration period, it's important to check your Tax by Invoice report for any "old" invoices that may have been paid previously due to expiration. You need to back out these amounts from your payment calculation manually and keep a record of this calculation.

• After you have paid taxes on invoices older than the expiration, your company needs to keep track of this. There is no way to record which expired invoices have been paid previously and which one's have not. It's possible to use date ranges and reporting as long as someone at your company keeps manual and accurate records regarding which invoices and periods have been paid due to expiration.

5. For Open Item accounts, an invoice is only considered paid when the invoice (open item) is paid in full. Partial payments of sales tax are never considered or reported.

6. The standard Sales Tax report and Inquiry forms don't reflect "paid" tax, only the tax charged. The Tax by Invoice report is the only built-in report provided relevant to pay-when-paid programs.

We recommend that you keep paper copies of all Tax by Invoice reports (and electronic also if desired) and maintain records related to expired invoices that you have paid and the invoices for each period you pay taxes on. Reports are never saved as documents, so it's important to have paper records of tax payments in a secure location should there be a serious problem with your database, such as fire, etc.

In addition, you may want to create and use a custom report, if the Tax by Invoice report is not sufficient to meet your tax requirements. You can check our customer portal for available report templates, create your own report, or ask our expert Support team to write a custom report that meets your needs specifically. This is billable service.