Moderated by Kate, Financial Technology Consultant at Hyperbots
Kate: Good morning, everyone. My name is Kate, and I’m a financial technology advisor here at Hyperbots. Today, I’m delighted to have Claudia Mejia as my guest. Hello, Claudia! How are you doing?
Claudia Mejia: Hi, Kate, how are you? Nice to see you.
Kate: I’m doing great, nice to see you too. Claudia is the managing director at Ikigai Edge Consulting. Today, we will be discussing handling tax liability for undercharged sales tax invoices. So, coming to the first question, what should a company’s first step be if a vendor charges less tax than required on an invoice?
Claudia Mejia: The first step will be to determine who is responsible for paying the tax. In most cases, it’s the vendor who is responsible, and therefore, ideally, you should contact the vendor and inform them about the undercharge and ask for the invoice to be corrected. That’s the cleanest way to handle those kinds of errors and ensure compliance. For example, if you receive an invoice that’s supposed to have a 7% tax rate but is issued with 5%, you would call the vendor and advise them to review and correct the invoice. That’s probably the cleanest approach.
Kate: Understood. Moving on, why is it usually best to ask the vendor to issue a corrected invoice rather than paying the deficit directly to the state?
Claudia Mejia: That ensures the vendor handles the tax obligations correctly and maintains accuracy. It also makes it easier for auditors to follow these transactions. If an invoice is incorrect from a tax point of view, the corrective action is to call the vendor and ensure it is amended. This way, both parties have accurate information for tax obligations.
Kate: So, if the vendor is unwilling or unable to issue a corrected invoice, what should the company do next?
Claudia Mejia: The company should self-assess the difference of the undercharge and pay the tax directly to the state as a use tax. This mechanism allows the buyer to fulfill their tax obligations and ensure their records align with legal and tax requirements.
Kate: That does make a lot of sense. Could you explain what use tax is and why it might be necessary in cases of undercharged sales tax?
Claudia Mejia: Like we mentioned, the vendor is usually responsible for collecting and remitting the tax to the state. However, if the vendor cannot or will not issue a corrected invoice, the buyer has the ability to pay the tax directly to the state. Use tax is essentially a tax paid by the buyer directly to the state when the vendor fails to collect the appropriate tax. For example, if I’m a buyer in New York and purchase supplies out of state where no tax or insufficient tax is collected, I can remit the correct tax amount directly to the State of New York.
Kate: I understand. Moving on, why is it important to document communication with the vendor and use any tax payments made to the state?
Claudia Mejia: The most important aspect of financial records is ensuring compliance. Proper documentation helps during audits and provides a clear record of transactions. By documenting communication with the vendor and any payments made to the state, you proactively work to ensure compliance. This also keeps your books and cash flow clean, resulting in sound financial transactions.
Kate: I agree completely, Claudia. We have reached almost the end of our discussion today. The last question is, what is the best long-term approach if undercharging becomes a recurring issue with the vendor?
Claudia Mejia: Being proactive is key. Regularly review invoices to ensure compliance with state tax rates. If undercharging is identified, follow the processes: contact the vendor and request a corrected invoice. If that’s not possible, self-assess and pay the use tax directly. Having a robust process ensures these errors are identified and addressed promptly. Ultimately, this approach helps maintain compliance with the state and ensures accurate financial records, creating a cycle of control and accountability.
Kate: You’re right, and that is a really interesting point. Thank you so much, Claudia, for your time and insights, and a big thanks to our listeners. I’ll see you next time. Have a great day.
Claudia Mejia: You too!
