Why an internal control checklist matters

Sales tax rules vary by state and change often. The 2018 Supreme Court decision in South Dakota v. Wayfair expanded states’ ability to require remote sellers to collect sales tax, increasing exposure for many businesses. A formal internal control checklist reduces the risk of uncollected taxes, penalties, and interest by making tax responsibilities repeatable, auditable, and accountable. In my 15+ years advising businesses, the firms that survive state reviews are those that treat sales tax like a governed process, not an afterthought.

Core components of a sales tax internal control checklist

Below are the essential control categories to include in a living checklist. Each item should have a frequency (daily/weekly/monthly/quarterly/annual), an owner, and a clear acceptance criterion.

  1. Nexus & Registration
  • Inventory all states where you have physical presence, employees, inventory (including third‑party fulfillment centers), or economic nexus based on sales thresholds. (See South Dakota v. Wayfair, 2018.)
  • Verify active registration status and renewal dates for each state or locality where you collect tax.
  • Document the legal basis and date for nexus determinations; update quarterly or whenever business operations change.
  1. Taxability Matrix
  • Maintain a current taxability matrix that maps products and services to state/local tax rules (taxable, partially taxable, exempt, or subject to local surtax).
  • Assign a subject-matter owner for each product line who will approve changes to the matrix.
  1. Pricing & Point-of-Sale Controls
  • Validate that point-of-sale (POS), e-commerce platforms, and invoicing systems apply the correct tax code and rates.
  • Require automated rate lookups from a vetted tax engine or service and log rate decisions when you hard-code a rate.
  • Implement a change-control workflow for rate or product-taxability updates.
  1. Exemption Certificate Management
  • Capture exemption certificates at sale for exempt customers and store them in a secure, searchable certificate repository.
  • Track certificate expiration and automate renewal reminders.
  • Periodically (at least annually) test certificate validity against documented business reasons for exemption.
  1. Sales Tax Collection & Remittance
  • Reconcile sales tax collected to sales recorded each period (daily/weekly/monthly depending on volume).
  • Prepare and review returns before filing; have a second approver sign off on amounts and jurisdiction mapping.
  • Maintain a calendar of filing frequencies and due dates, with escalation paths for missed filings.
  1. Reconciliations & GL Controls
  • Reconcile the sales tax payable general ledger account to the tax calculation system monthly.
  • Investigate variances larger than a defined threshold (e.g., 1% of tax liability) within the current month.
  • Document correction entries and why they were required.
  1. Record Retention & Documentation
  • Retain sales records, exemption certificates, and return filings for the longest statutory retention period across jurisdictions you operate in (commonly 3–7 years, but vary by state).
  • Keep a running audit file that explains significant adjustments and unusual transactions.
  1. Reporting, KPIs & Monitoring
  • Track key metrics such as tax collected vs. expected, number of exempt transactions, and certificate coverage rate.
  • Use dashboards to spotlight sudden changes in taxability or volume by jurisdiction.
  1. Audit Readiness & Response Plan
  • Maintain a documented audit response playbook: contacts, document pull lists, timeline expectations, and delegated responsibilities.
  • Keep copies of previously filed returns and supporting workpapers readily available.
  1. Training & Policies
  • Publish a written sales tax policy that covers collection practices, exemptions, and escalation paths.
  • Train sales, customer service, accounting, and e-commerce staff annually and when major rule changes occur.

Sample monthly checklist (template)

  • Owners: Sales Tax Compliance Officer; Accounting Manager
  • Items:
  • Reconcile monthly sales and tax collected to GL (Due: 7 business days after month-end).
  • Verify all nexus changes for the period (Due: monthly).
  • Review exemption certificate inventory; flag expirations (Due: monthly).
  • Confirm rate updates applied to POS and e-commerce systems (Due: monthly).
  • Prepare draft returns and schedule second-approver review (Due: X days before filing deadline).

Practical controls you can implement quickly

  • Use a dedicated tax engine or the sales-tax automation services described in FinHelp’s guide on implementing automation: How to Implement Sales Tax Automation for Small Businesses.
  • Configure role-based access to tax settings in your ERP/POS so non-authorized staff cannot change rates.
  • Create a single source of truth (a shared taxability matrix and certificate repository) and point every team to that system.

Real-world examples and lessons

  • Example 1 — Remote seller surprise exposure: A retail client omitted sales shipped from a third-party warehouse in another state. The client lacked a simple quarterly nexus review and faced back taxes and penalties. Adding a monthly nexus checkpoint prevented further exposure.
  • Example 2 — Missed exemption renewal: A B2B seller collected certificates but didn’t track expirations. Renewals lapsed, and the state assessed liabilities for previously exempt sales. The fix: automate expiration reminders and a quarterly certificate audit.

Integration with existing risk and audit programs

Include sales tax controls in the company’s internal audit plan. If you have an internal audit or SOX program, map sales tax checklist controls to control objectives (authorization, accuracy, completeness, and segregation of duties). An integrated approach avoids duplicate work and strengthens overall governance.

Common mistakes to avoid

  • Treating nexus as a one-time determination. Business models change—fulfillment partners, remote employees, or marketing activities can create new obligations.
  • Relying solely on sales teams to identify taxable items without a documented product classification process.
  • Not reconciling tax collected to the GL monthly, which creates surprise exposures.

How to measure effectiveness

  • Certificate coverage rate (target: 95%+ for exempt B2B customers).
  • Timeliness of filings (target: 100% on-time filings).
  • Variance between expected tax liability (from tax engine) and actual remittance (target: <1% monthly variance).

Audit playbook highlights

  • Centralize documents: returns, returns workpapers, exemption certificates, shipping and billing records.
  • Time-stamp and preserve original transaction records; provide a mapped narrative that explains adjustments.
  • If you get an audit notice, stop collection of additional documents only at attorney direction; preserve evidence and follow the playbook.

Additional resources

Quick checklist summary (one-page)

  • Review nexus and registrations — monthly
  • Maintain taxability matrix — update as products change
  • Automate rate lookups in POS/e-commerce — required
  • Store and monitor exemption certificates — automated reminders
  • Reconcile tax collected to GL and file returns on time — monthly/quarterly
  • Document policy, train staff, and maintain audit file — ongoing

Final professional tips

  • Start with the highest-risk areas: nexus, exempt sales, and reconciliations. Fix these before optimizing lower-risk tweaks.
  • When in doubt, retain a CPA or state tax specialist for nexus and multistate exposure analysis—this is often cheaper than paying interest and penalties after an audit.
  • Periodically test your controls with a small internal audit focusing on one state or product line before scaling the tests companywide.

Disclaimer

This article is for educational purposes only and does not constitute legal, tax, or accounting advice. Rules differ by state and by business facts; consult a licensed tax professional or attorney for advice tailored to your situation.