§ 34.2. Keeping of records.
(a) General requirements. The act provides that every sale of tangible personal property or services thereon shall be presumed to be at retail and to be subject to sales tax. Therefore, every person who sells or uses personal property or services shall be required to keep the following basic records:
(1) For purposes of accountability for use tax, taxpayers shall be required to retain purchase invoices, requisitions, documents and other records relating to their acquisition of tangible personal property and services. The purchaser shall maintain records showing that the tax was paid where the purchaser has paid the tax to his vendor, and where the purchaser has not paid tax to his vendor but has paid use tax directly to the Commonwealth. Where the purchaser has not paid tax in the above cited instances, he shall create and maintain records showing the reason he considered the purchase as nontaxable, and information concerning the nature, use, price and dates of purchases and use of the property, from which it can be ascertained by the Department, with reasonable facility, whether or not use tax is due thereon and, if due, the amount of tax.
(2) As a minimum for practicable enforcement, the act required the following sales tax records which are amenable to a three-point audit:
(i) With respect to sales, records shall be maintained for each store or other outlet showing the total amount of taxable and nontaxable sales, that is, gross sales, made on each day and during each tax reporting period. Total sales should also be divided as to cash sales and credit sales.
(A) Sales tax records shall be maintained from which it is possible to ascertain the vendors compliance with the taxing and exemption features of the act, that is, whether sales made without collection of tax were in fact nontaxable. The records shall describe items sold without tax, and show those sales which were made tax free because the purchase price was less than the amount at which the statute begins to impose tax. This is the first essential for determining the amount of tax incurred in the vendors business.
(B) The vendor shall obtain from purchaser and also retain certificates of exemption with respect to sales of a taxable character which are sold tax free on the claim that they are exempt because of the nature of the purchasers activity and the use for which they are purchased. In such cases, the identification of items sold as well as the purchaser is necessary because the use of property in many instances is clearly determined by the identification. For example, stationery may not be validly exempt under a certificate stating that it is to be used directly in the production, rendition or delivery of a public utility service.
(ii) The second essential is that sales tax records shall show the tax incurred on each taxable sale so that a so-called effective rate may be determined. Under the bracket schedule established by the TRC the rate of tax incurred varies according to the purchase price of the sale. The overall effective rate of the vendors tax incurred cannot be determined unless there are reliable sales records showing the taxable sales price of individual sales.
(iii) Apart from accountability of tax incurred, records of the amount of tax actually collected by the vendor shall be essential for the following reasons:
(A) Since the vendor is a trustee with respect to the taxes he has collected, the keeping of records which will clearly reflect his performance of his responsibilities is basic to this fiduciary relationship. The TRC, in recognition of this, requires that a vendor shall remit the amount of tax due, incurred or the amount actually collected, whichever is greater.
(B) The burden which would be placed on vendors whose businesses involve a large number of mixed sales if they were required to maintain complete records of the tax incurred on every individual sales transaction as described in this paragraph have long been recognized by the Department. Therefore, vendors shall be permitted to keep records of tax incurred on a sample basis under standards discussed in detail in subsection (b).
(C) If a vendor, for his own convenience, computes and reports his tax incurred on the basis of a formula derived from part-time, sample or test check recordkeeping, complete records of the amount of tax actually collected at each outlet together with a record of sales at each outlet, provide a practical basis for comparison with the results of the formula. This continuous check is useful both to the vendor and the tax agency in gauging the reliability of the formula, and the tax consciousness of store personnel.
(iv) A vendors duty to collect and remit tax on taxable sales, his liability for tax due if he fails to collect properly, and his duty to keep records from which liability for tax incurred and tax collected can be ascertained, are clearly imposed in the TRC. Reference should be made to sections 208, 237(b) and 271 of the TRC (72 P. S. § § 7208, 7237(b) and 7271).
(3) The memoranda or records required to be created at the time of sale may take the form of sales slips, sales invoices, guest checks, tally sheets, itemized lists, memoranda or other records provided they meet the requirements of this section as to content. Thus, a copy of a cash register tape retained by the vendor may meet the requirements of an auditable sales tax record if it bears sufficient identification of the items sold and other required information.
(i) Within reasonable limits, items may be described by a symbol if the symbol is representative of a class of merchandise or services all of which constantly remains taxable or nontaxable. Thus, if a vendor sells only nontaxable periodicals in his Department P, a description of such merchandise as Dept P is sufficient provided the vendor uses such symbol consistently in all of his records to describe the same merchandise. However, if a vendor sells several types of merchandise of both taxable and nontaxable merchandise in a single department, his records shall identify individually the types of merchandise which are nontaxable.
(ii) The following shall constitute an example: JOHN DOE STORE
Sales Slip Jan. 15, 1968 To: Roe Ribbon Mill 1. 1 Coffee percolator $16.80 2. 1 hacksaw 4.25 3. 1 pr. doorknobs 3.10 $24.15 (6 percent Sales Tax$1.45) 4. 6 prs. cotton gloves 4.20 5. 2 bearings (loom)
Manuf. Exemp. Cft.
8.50 $36.85 Sales Tax 1.45 $38.30
(A) It is assumed for the purpose of this example that the Roe Ribbon Mill has furnished the Doe Store a manufacturers exemption certificate. Since this exemption covers only items used directly in manufacturing, items 1 and 2 are taxable. Since the exemption does not cover maintenance of realty, item 3 is taxable. No tax is incurred on item 4 because clothing is exempt. No tax is incurred on item 5 since it is covered by the manufacturers exemption. Therefore, the total taxable sale price is $24.15. On this price, the tax incurred is computed as follows:
6 percent on full dollar amount (6 percent of $24.) $1.44 6 percent on cents amount of price under the Bracket System (11¢ to 17¢ incl.) .01 TOTAL TAX INCURRED $1.45
(B) Notice how the sales slip in this example, supported by the exemption certificate, permits an audit of the vendors performance in applying tax status rules to arrive at nontaxed items and in computing the tax incurred on the taxable amount of the sale. Had the vendor incorrectly determined the tax at less than $1.45, he would nevertheless be liable for payment of the correct amount. If he had collected more than $1.45 he would be liable to the Commonwealth for the amount collected unless he showed that he had refunded the overcharge to the purchaser.
(b) Part-time recordkeeping. Part-time recordkeeping shall conform with the following:
(1) General considerations. The Department upon application by a vendor may authorize him to use a sample recordkeeping system from which a formula may be derived to account for his tax due with reasonable accuracy and simplicity without the necessity of maintaining full-time detailed records as described in subsection (a). Such authorization is not to be construed as relieving the vendor from remitting the full amount of tax collected. Reference should be made to section 271(e) of the TRC. The Department may revoke the authorization upon 30 days written notice to the vendor. The vendor may terminate the use of the authorized procedure by giving to the Department written notice preceding the proposed termination date by a time period not less than the vendors tax reporting period.
(i) No appeal lies directly from the Bureaus refusal of a vendors application for a formula procedure. However, the merits of a proposed formula and the action of the Bureau thereon are reviewable in connection with the hearing and determination of a petition for reassessment from a deficiency arising from the use of the formula. Reference should be made to section 271(e) of the TRC and subsection (c).
(ii) If a vendor wishes to set up a formulary record system without prior concurrence by the Bureau, there shall be nothing to prevent his doing so, but in acting unilaterally he shall proceed at his own risk. Upon audit, the Bureau and subsequent reviewing bodies may find that his sample records and formulary system are not sufficiently representative or adequate. If he operates without a prior agreement, when the time comes for an examination of his accountability his records shall speak for themselves. If the records which he has maintained are such that his nontaxables and rate of tax incurred on taxable sales cannot reliably be ascertained, he shall be in no position to contend that he has kept adequate sales tax records. Rather, he shall be in the same position as another vendor who lacks adequate sales tax records.
(iii) A formula method shall be based upon representation samplings, tests, of the vendors transactions and application or projection of the results of the samplings to reliably establish the amount of tax incurred on his sales. Samplings may be employed to determine the percentage ratio of nontaxable and taxable sales to gross sales, and the percentage ratio of tax incurred to taxable sales. Ordinarily, an applicant will be expected to provide for a sample of at least one of each of the normal business days of the week during each calendar quarter. This shall be done by testing all transactions on 2 days a month and rotating the test days to include, in each calendar quarter, all selling days of the week. Vendors operating more than one store or sales outlet shall test all stores or outlets on each test day, and separately apply test results in each store to the sales of that store, except where a vendor demonstrates by experience with sampling that a smaller sample or modified procedure is adequate and reliable, the Department will consider his specific written proposal and may authorize further adjustments on that basis.
(iv) While the act does not specifically mention special recording procedures or formulary methods with respect to use taxes, the Department will accept such applications as are filed and, consistent with the law and the safeguarding of public revenues, will consider the granting of the permission to persons required to remit use tax in particular circumstances where the facts warrant the treatment. Persons holding or desiring to obtain direct pay permits may seek the dual permission (with accompanying responsibilities) of remitting under the direct pay permit provisions and in accordance with an authorized special recording procedure or formula method. Reference should be made to section 237(d) of the TRC.
(2) Conditions of granting of authorization. The granting of authorization to use a special recording procedure or formula method shall be subject to the following requirements and conditions:
(i) The vendor shall submit an Application for Special Recording Procedure (Form REV-134) to the Department of Revenue, including a full and description of the material facts and methods of his various operations as they affect his tax liability, and the procedures he proposes to employ. This application shall be accompanied by a detailed written statement of the circumstances which, in his opinion, warrant the use of a special procedure.
(ii) Authorization to employ a special recording procedure for determining tax due may not be construed to relieve the vendor of responsibility for maintaining, with respect to each store or sales outlet, records showing the following:
(A) The actual amount of tax collected and
(B) Gross sales per day and tax reporting period.
(iii) The proposed procedure shall include provision for the following:
(A) A continuing training program for the vendors employes in applicable sales and use tax provisions.
(B) Supervision of tests and verification of test results by qualified personnel.
(C) Recording and retention of test data, including work sheets, in such manner and detail that the Department may ascertain, with reasonable facility, the accuracy and validity of the tests.
(D) Maintenance of adequate records of all purchases.
(E) Adequate provision for accounting for tax collection.
(F) Prompt notification of the Department by the vendor of material changes in his business operations or sales, including merchandising and accounting methods and procedures.
(iv) During such time as the authorized procedure agreement is in effect and in the absence of material changes in the vendors business operations, including his merchandising and accounting methods and procedures, it shall be used to determine the amount of tax due by the vendor on the transactions covered by the authorization, provided such authorization was not obtained by means of fraud, misrepresentation or nondisclosure of material facts.
(v) A vendor, having represented in his application that a certain sample period is adequate for reporting purposes and having agreed to remit to the Commonwealth the greater of the amount of tax due as shown by his formula or tax collected, cannot state, upon audit by the Department, that the sampling is inadequate for auditing purposes.
(vi) The granting of special authorization may not be deemed a waiver by the Department of its right to audit fully the books, documents, records and transactions of the vendor to determine whether the authorization was properly obtained, whether the vendor has complied with the terms and conditions of the agreement and whether he has accounted to the Department for all tax collected.
(vii) The Department will not revoke retroactively its grant of an authorization that has been obtained and applied in good faith under this section. However, the Department reserves the right to conduct audits to determine whether the authorized formula currently reflects the vendors true liability and to revoke a formula agreement prospectively.
(viii) The vendor shall, if directed by the Department, furnish a bond or other security guaranteeing faithful compliance with the authorized procedure and this section.
(3) Conditions under which authorization will not be granted. Authorization to employ a special procedure or formula method will not be granted in the following instances:
(i) Where the nature of the vendors business or the value of units of merchandise sold do not make it unreasonable to require full-time employment of the accounting prescribed in subsection (a).
(ii) Where the Department has found that the vendor has failed to comply with requirements of the act or regulations.
(iii) Where, in the opinion of the Department, the best interests of the Commonwealth will not be served by granting the authorization.
(c) Liability of vendor who has not kept auditable sales records. Courts and administrative boards have, in numerous cases where a vendor has failed to keep the records necessary for auditing his tax liability, sustained the right of a tax agency to base an assessment on methods which fairly and reasonably approximate the liability incurred. Where a vendor has not kept complete auditable records or has used an unauthorized formula, evidence of sample data which he has compiled and used in reporting tax on a formula basis is of course admissible. However, under these circumstances the prima facie validity of the tax agencys test audit is difficult to overcome. Courts and administrative bodies have subjected the evidence to close scrutiny because it was compiled without permission, supervision or verification by the tax agency. Reference should be made to section 271(e) of the TRC.
(d) Accounting for and handling tax collections. Taxes collected by a vendor from purchasers which have not been properly refunded by the vendor to the purchaser shall constitute a trust fund for the Commonwealth. Since the vendor is a trustee with respect to the taxes he has collected, the keeping of records which will clearly reflect his performance of his responsibilities is basic to this fiduciary relationship. The act, in recognition of this, requires that a vendor shall remit the amount of tax due or the amount actually collected, whichever is greater.
(1) Physical segregation of tax where collections are not shown on sales memoranda or cash register tapes. The act provides that a vendor must adopt some method of segregating tax from sales receipts and record such in accordance with proper accounting and business practices. Reference should be made to section 271(e) of the TRC.
(i) If a vendor keeps full-time memoranda of sales showing the amount of tax due and the amount charged to the purchaser as provided in subsection (a), he will not be required to physically segregate his tax collection from sales receipts or create other records of tax collections of individual sales.
(ii) If a vendor uses a register which lists each tax collection on a tape retained by the vendor, or if he makes a list or record manually and retains it for Departmental audit, he will not be required to physically segregate his tax collections, unless the Department, because of special circumstances, notifies him to do so. A vendor may, of course, segregate his tax collection. The fact that tax collections are not physically segregated from sales receipts may not be deemed a waiver of the Departments procedural rights to enforce the trust which exists with respect to tax collections.
(e) Accessibility of information and records. Records, including sales memoranda and records created at the time of sale and other documents, books or records pertaining to tax liability and tax collections shall be dated, legible, written in the English language and maintained and preserved to disclose in readily accessible and verifiable detail the basis for and accuracy of the vendors or users entries on his sales and use tax returns.
(1) Persons engaged in separate businesses. A person engaged in business as a retail dealer in taxable items who, at the same time, is engaged in another business or businesses which do not involve the making of taxable sales, shall keep separate books and records of his businesses. For example, a person engaged in business as a retail dealer who is also engaged in business as a construction contractor, shall keep separate records and accounts of his retail business and his construction business. Reference should be made to section 271(d) of the act.
(2) Audit requirement. Upon audit by the Department, or at such other times as the Department requests, the vendor or user shall present his records in an orderly manner, together with the summaries and schedules the Department may request. The vendor or user shall provide the auditors or examiners of the Department with suitable facilities for conducting their audit or examination.
(3) Retention of records. Records required to be maintained under the act or this section shall be retained for a period of at least 3 years from the end of the calendar year to which the records relate. Reference should be made to section 272 of the TRC (72 P. S. § 7272).
(f) Place where records and tax collections shall be kept. Records and tax collections shall be kept in accordance with the following:
(1) Where a person makes sales at or from establishments or locations within this Commonwealth, records relative to the transactions and the sales and use taxes collected at those points shall be retained within this Commonwealth, unless the vendor has written authorization from the Director of the Bureau of Sales and Use Tax to remove them. The authorization shall be revokable by the Director upon 30 days written notice.
(2) Where a person makes sales on which he is liable for the collection of sales or use tax at or from establishments or locations outside this Commonwealth, records relative to the transactions and sales and use taxes collected outside this Commonwealth may be maintained in this Commonwealth or retained at the establishments or locations at or from which the sales were made or at the home office of the vendor. If special problems arise, vendors shall contact the Department of Revenue for advice.
(3) Records created or received by a person within this Commonwealth with respect to his use of property or services on which he is subject to tax shall be retained within this Commonwealth.
(g) Microfilm reproduction of general books of account and supporting records of detail. The Department of Revenue will consider the microfilm, including microfiche, reproduction of general books of account and their supporting records of detail as acceptable books and records when the reproduction satisfactorily complies with the standards and procedures established by the United States Internal Revenue Service and approval of the reproduction is granted by the same. In addition, the taxpayer shall make available necessary codes and equipment to enable the Department to audit the books and records.
The provisions of this § 34.2 amended December 19, 1975, 5 Pa.B. 3277.
Notes of Decisions
Accessibility of Records
The taxpayer failed to produce required records when requested during the audits and again during the evidentiary hearings. Boxes of unsorted invoices, bills of lading, weight slips, drivers logs, and other documents do not permit the taxing authority to ascertain with reasonable facility whether tax is due and how much tax is due. The taxpayer has suffered the consequences of inadequate record keeping in that the taxpayer was unable to document use of the assessed equipment in providing public utility services. Fiore v. Commonwealth, 609 A.2d 862 (Pa. Cmwlth. 1992); vacated 633 A.2d 1111 (Pa. 1993); 668 A.2d 1210 (Pa. Cmwlth. 1995); adhered to 676 A.2d 723 (Pa. Cmwlth. 1996); affirmed 690 A.2d 234 (Pa. 1997); cert. denied 118 S. Ct. 181 (U. S. 1997).
The taxpayer failed to produce the necessary records when requested during the audits and again during the evidentiary hearings. Boxes of unsorted invoices, bills of lading, weight slips, drivers logs, and other documents did not permit the taxing authority to ascertain with reasonable facility whether tax was due and how much tax was due. The taxpayer suffered the consequences of inadequate record keeping in that taxpayer was unable to document use of the assessed equipment in providing public utility services. Fiore v. Commonwealth, 609 A.2d 862 (Pa. Cmwlth. 1992); vacated 633 A.2d 1111 (Pa. 1993); 668 A.2d 1210 (Pa. Cmwlth. 1995); adhered to 676 A.2d 723 (Pa. Cmwlth. 1996); affirmed 690 A.2d 234 (Pa. 1997); cert. denied 118 S. Ct. 181 (U. S. 1997).
The records maintained by the taxpayer were inadequate to show why no use or sales tax was paid. Fiore v. Commonwealth, 609 A.2d 862 (Pa. Cmwlth. 1992); vacated 633 A.2d 1111 (Pa. 1993); 668 A.2d 1210 (Pa. Cmwlth. 1995); adhered to 676 A.2d 723 (Pa. Cmwlth. 1996); affirmed 690 A.2d 234 (Pa. 1997); cert. denied 118 S. Ct. 181 (U. S. 1997).
A taxpayer who produced no credible evidence to show entitlement to the public utility exclusion it claimed could not avail itself of the exclusion. Fiore v. Commonwealth, 609 A.2d 862 (Pa. Cmwlth. 1992); vacated 633 A.2d 1111 (Pa. 1993); 668 A.2d 1210 (Pa. Cmwlth. 1995); adhered to 676 A.2d 723 (Pa. Cmwlth. 1996); affirmed 690 A.2d 234 (Pa. 1997); cert. denied 118 S. Ct. 181 (U. S. 1997).
A taxpayer who sells or uses personal property or services must: 1) retain all purchase invoices and other documents relating to acquisition of taxable property and services, and 2) if the tax has not been paid, the taxpayer must create or maintain records documenting the nature, use, price, dates of the purchase, etc. from which it can be ascertained with reasonable facility whether use tax is due and the amount of the tax. Fiore v. Commonwealth, 609 A.2d 862 (Pa. Cmwlth. 1992); vacated 633 A.2d 1111 (Pa. 1993); 668 A.2d 1210 (Pa. Cmwlth. 1995); adhered to 676 A.2d 723 (Pa. Cmwlth. 1996); affirmed 690 A.2d 234 (Pa. 1997); cert. denied 118 S. Ct. 181 (U. S. 1997).
Although not relieved of the duty to comply with statutes and regulations regarding records of purchases and their use, taxpayer was denied procedural due process and entitled to a new hearing to allow it to address those defenses to taxpayers claim raised by the Commonwealth after the administrative adjudicators and 20 days prior to the evidentiary hearing. Fiore v. Board of Finance and Revenue, 633 A.2d 1111 (Pa. Cmwlth. 1993).
This section cited in 61 Pa. Code § 35.1 (relating to tax examinations and assessments).
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