Can a Texas business discard paper invoices and keep only a summarized electronic 'Transaction Audit Trail' as its sales tax records?

Plain-English summary

A taxpayer's business created an invoice for every transaction and asked the Comptroller whether it could throw away the bulky paper invoice copies and instead keep only a "Transaction Audit Trail" — a summarized electronic record.

The Comptroller said businesses may keep records on other mediums or in other formats (such as microfilm) as long as three conditions are met:

• the records stay in a form Comptroller personnel can examine;
• any record or certificate that needs a signature is kept in original or microfilmed form so the signature can still be verified; and
• the substitute records contain all the relevant information that was in the original source documents.

The taxpayer's proposed Transaction Audit Trail listed the store number, invoice number, date, customer name, vehicle description, a description of materials used, and the subtotal, tax, and total invoice amounts — but it did not break out the itemized sales price of the individual repair parts. Without that detail, the Comptroller said the repairs would be treated as lump-sum repairs. Under that treatment, any tax the taxpayer collected from customers would be considered collected in error and owed to the state, and the repairman itself would be treated as the consumer of the repair parts, owing tax on the parts' initial cost instead. The summary could not be altered to break out that pricing detail unless the same breakdown also appeared on the invoices given to customers.

The letter also recommends — though does not require — retaining source documents for a period of time to show the link between the source documents and the summarized transaction trail, and keeping a backup copy of any electronic records.

What this means for you

Business owners and repair shops

If you want to discard paper invoices in favor of a scanned, microfilmed, or summarized electronic record, make sure the substitute record captures every piece of information that was on the original — especially any itemized pricing that distinguishes taxable parts from labor or other charges. Dropping that detail can convert itemized, correctly-taxed repair transactions into "lump-sum" repairs, which changes who owes the tax and can create an unexpected liability for the business itself.

Accountants and tax professionals

When designing a client's document-retention or record-summarization system, check that (1) the format remains examinable by the Comptroller, (2) any signed documents are preserved (original or microfilmed) so the signature can be verified, and (3) the summary preserves all information from the source documents — not just the fields a client finds convenient. This ruling is a useful illustration of how losing itemized pricing detail alone can flip a repair job from itemized to lump-sum tax treatment.

Common questions

Q: Can a business keep records on microfilm or microfiche instead of paper?
A: Yes. The Comptroller has no objection to maintaining business records on other mediums or formats, provided the records remain examinable, signatures on original or microfilmed documents remain verifiable, and all relevant information from the source documents is retained.

Q: What happens if a summarized record drops detail that was on the original invoice?
A: In this ruling, omitting the itemized price of repair parts from the summary meant the repairs would be seen as lump-sum repairs. That means tax collected from the customer would be considered collected in error and due to the state, while the repairman would be treated as the consumer of the parts and would owe tax on their initial cost.

Q: Can the missing pricing detail be added back into the summary only, without changing the customer invoice?
A: No. The letter states the transaction detail listing cannot be altered to break out those amounts unless they are also broken out on the invoices given to customers.

Q: Does this letter require keeping the original paper invoices?
A: It doesn't require it, but it says it is "generally a good idea" to retain source documents for a period of time to show the relationship between the source documents and the transaction trail, and to keep a backup copy of any electronic records.

Citations and references

Rules:

• 34 Tex. Admin. Code Rule 3.286 (seller's and purchaser's responsibilities — records; the letter cites Section (g), which discusses required records)
• 34 Tex. Admin. Code Rule 3.281 (information and records required; the letter cites Section (b), which allows the Comptroller to estimate tax liabilities when accurate records are not maintained)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9303982L

Original ruling text

March 9, 1993

Dear **:

Thank you for your letter of January 8, 1993 concerning record retention of
source documents.

** creates an invoice for each transaction. Your firm would like to
retain a "Transaction Audit Trail" that will allow you to discard the bulkier
invoice copies.

We do not have any problems with your firm maintaining business records on
other mediums or in different formats provided that:

• these records are maintained in a manner that allows examination by
  Comptroller personnel

• any records or certificates requiring a signature are maintained in an
  original or microfilmed form such that the signature may be verified

• the records must contain all relevant information contained in the original
  source documents

The transaction trail, enclosed with your letter, provides the store number,
invoice number, date, customer name, vehicle description, a description of
materials used, and the subtotal, tax, and total invoice amounts. The
transaction listing does not give detailed information as to the sales price of
the repair parts. Without this information, the repairs will be seen as
lump-sum repairs. The tax collected would be considered collected in error and
due to the state. The repairman (your firm) would be considered the consumer of
repair parts and would owe taxes upon the initial cost of the items used in
these repairs.

The transaction detail listing cannot be altered to break these amounts out
unless they are also broken out on the invoices given to your customers.

Rule 3.286 concerning seller's and purchaser's responsibilities is enclosed.
Section (g) discusses required records. Rule 3.281 concerning information and
records required is also enclosed for your review. Section (b) states that the
Comptroller may estimate tax liabilities in the event that accurate records are
not maintained.

If your firm retains records or documentation on other mediums, it is generally
a good idea to retain source documents for a period of time in order to
indicate a relationship between source documentation and the transaction trail.
It is also advisable to maintain a backup copy of any electronic records.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

You may call me toll free at 1-800-531-5441, ext. 5-0613. The direct line is
512/475-0613. You may also write to Tax Administration Division, Comptroller of
Public Accounts.

Sincerely,

Kevin Koller
Tax Administration Division