United States sales tax invoicing rules: credit notes and record retention

Sales tax is set by states and localities

Sales tax in the United States is set by states and many local jurisdictions. There is no single national rate, so this article does not list rates or thresholds. Check the revenue agency of each state where your customers are located, and use that agency's current rules for rates and filing.

Capture the data your invoices need

Design your invoice data around the questions state and local rules ask. Store the customer's ship-to location, the taxable amount and tax charged on each line, and the exemption certificate reference for any exempt sale. Keeping these fields on the invoice record makes it easier to answer an audit or a filing question months later.

Credit notes and refunds

When a sale is returned or its price is reduced, issue a credit memo that references the original invoice number and date, the reason for the change, and the tax being reversed. Whether tax is refunded to the customer and how the filing is adjusted depends on the state. Link each credit memo to the original invoice in your system so you can match the reversal to the sale.

Record retention

The IRS says to keep business records for 3 years if none of its longer periods apply. The longer periods are:

• 6 years, if you leave out income that is more than 25% of the gross income shown on your return.
• 7 years, if you claim a loss from worthless securities or a bad debt deduction.
• Indefinitely, if you do not file a return or file a fraudulent return.
• At least 4 years after the date the employment tax is due or paid, whichever is later, for employment tax records.

For property records, keep them until the period of limitations expires for the year you dispose of the property.

These are federal income tax periods. Sales tax retention is set by each state, so confirm the period for each state where you collect tax.

Next step

Read the developer documentation to see how to store tax lines and credit memos in your integration.