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straightforward question for you guys:

I have an online retail business. I collect sales tax for in-state online purchases as required by state law.

My payments come via wire, Amazon payments, paypal, chase quickpay, checks, and cash. I receive cash (dollar bills and certified checks, money orders) in the mail from out of state buyers and I receive direct cash deposits into my bank accounts at out of state branches so buyers can avoid wire fees. I also deposit cash at my local branch as the $$ comes in.

I do not operate a physical retail store presence in my state but I am registered as an online business in my state. In other words I don't have a cash register printing receipts and such.

My annual in-state (sales tax applicable) sales are around $10,000 so I annually remit approx $600 that I've collected from these buyers(no one wants to pay sales tax so in state buyers shop elsewhere)

My annual cash deposits into my business account are around $80,000 to $100,000 --> we're literally talking 20's and hundreds. For reference, my total annual sales are over $1M. So we're talking 10% of sales maybe a little under.

I keep my books to the dollar and I report all of this cash as income and pay taxes on it.

Do I run the risk of a State Sales Tax audit for having so many cash deposits compared to sales tax collected? There's nothing "funny" about the amount or frequency of deposits. I do not structure or anything, I deposit cash as soon as I get it. Most deposits are 1-3k. and most are made at same branch.

Is it advisable for me to stop accepting payments this way? Many customers prefer being able to deposit cash directly into my account vs waiting for checks to clear.


Before you guys ask; no, I'm not cleaning money, and I'm not skimming. I am not worried about a federal income tax audit or even FBI looking into the large cash deposits because this is legit. JUST SALES TAX AUDIT.. I just have concerns about the state thinking I'm holding out on sales tax since I'm registered to collect sales tax on the few in-state sales I do have, so they have access to see that I've got $10k reported sales tax sales vs $1M total sales, then if they dig they'd see $100k cash deposits.. maaybe I am being paranoid.

I am not in California.

Thanks in advance...

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Just be sure that you have adequate and complete records for out-of-state sales showing the customer's name, address and method of shipping and delivery receipt. The local sales tax auditor will want to verify that the sales are actually being shipped to a customer out-of-state and not just made to appear that way.

I have a similar situation as far as my business out-of-state sales being much higher than in-state sales. As long as you have records of where the sales went, you should be fine. I am on the border of 3 states, I purposely advertise my business to the other 2 states so I can avoid sales tax collection. Each month I file my sales tax and exemptions (out of state sales or tax exempt sales), I've not been questioned or audited regarding sales tax for the 8 years this business has been around.

As jhburgess says, I wouldn't worry about an audit as long as you are keeping good records you will be fine. I don't think you need to stop accepting payments the way you do either, just make sure to record your income properly.

Are you reporting these out of state sales to the irs as sales and to the local tax board as outofstate sales? If not expect a bigger audit then what you are expecting

jhburgess said:   Just be sure that you have adequate and complete records for out-of-state sales showing the customer's name, address and method of shipping and delivery receipt. The local sales tax auditor will want to verify that the sales are actually being shipped to a customer out-of-state and not just made to appear that way.

Would the local sales tax auditor be *more* likely to look at me since I have cash deposits, or would they only "know" I have cash deposits *after* randomly choosing me?

Unless your behavior raises eyebrows in your bank, no government authority is monitoring the nature of your deposits.

TaxQuestion4FWF said:   jhburgess said:   Just be sure that you have adequate and complete records for out-of-state sales showing the customer's name, address and method of shipping and delivery receipt. The local sales tax auditor will want to verify that the sales are actually being shipped to a customer out-of-state and not just made to appear that way.

Would the local sales tax auditor be *more* likely to look at me since I have cash deposits, or would they only "know" I have cash deposits *after* randomly choosing me?


The sales tax auditor is not likely to know the nature of your deposits (cash vs. checks, etc.) until doing an audit of your records. The sales tax auditor won't care about cash, as long as all is accounted for. You're more likely to attract the attention of DEA with cash, especially if your bank reports the deposits as "suspicious".



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