I.  Background
This Directive is being issued to provide additional guidance with respect to the recordkeeping and record retention requirements applicable to sales/use tax vendors, particularly in connection with the use of Point of Sale (POS) systems.  As more fully described in Section IV.B of this Directive, POS systems include hardware and software to record and track sales at the point a retail sale is completed.

II.  Issue
What are the reporting and record retention requirements for sales tax vendors and how do they apply to vendors utilizing POS systems?

III.  Directive
Vendors, including those that use a POS system, must comply with the requirements in G.L. c. 62C, § 25; 830 CMR 62C.25.1 (the Records Retention Regulation); and this Directive.  Similar to paper recordkeeping, a POS system must record all transactions in a manner that will allow the Department to verify what was sold and whether the appropriate amount of tax was collected.  In circumstances where sales suppression software or other means are utilized in a willful attempt to underreport sales, civil and criminal penalties will apply as discussed in Section IV. C.

IV.  Discussion
A
.  General Requirements
Pursuant to G.L. c. 62C, § 25 and the Records Retention Regulation, every vendor, retailer and contractor[1] required by G.L. c. 64H and G.L. c. 64I to file sales or use tax returns must maintain a complete and accurate record of the gross receipts/expenditures from all purchases and sales, whether or not taxable.  Such persons must retain copies of tax returns filed together with supporting data to indicate how the figures in such returns were calculated.  See 830 CMR 62C.25.1(12)(f).  The Commissioner may require any person to keep such specific records as deemed necessary to determine the amount of such person's tax liability under the aforementioned chapters as well as those pertaining to any other tax or fee administered by the Department of Revenue (DOR).  G.L. c. 62C, §§ 3, 25; 830 CMR 62C.25.1(1).

In particular, every vendor, retailer and contractor must maintain the following records:

1.   a journal or its equivalent, which records daily all non-cash transactions affecting accounts payable;
2.   a cash journal or its equivalent, which records daily all cash receipts and cash disbursements, including any check transactions;
3.   a sales slip, invoice, cash register tape, or other document evidencing the original transaction, which substantiates each entry in the journal or cash journal;
4.   memorandum accounts, records or lists concerning inventories, fixed assets or prepaid items, except in cases where the accounting system clearly records such information; and
5.   a ledger to which totals from the journal, cash journal and other records have been periodically posted. The ledger must clearly classify the individual accounts receivable and payable and the capital account.

830 CMR 62C.25.1(12)(f)

Every vendor of meals, as defined in G.L. c. 64H, § 6(h), is required to maintain complete and accurate records of all sales of meals and alcoholic beverages, and all sales of non-taxable food and beverages.  830 CMR 62C.25.1(12)(g).  The records must include cash register tapes, alcoholic beverages bar checks, dining room meals checks, and a daily receipts book or record.  Id.  Vendors must retain copies of sales tax on meals returns filed.[2]  Id.

All records required by the Records Retention Regulation must be easily locatable, organized and in such form so that the Commissioner can ascertain whether liability for tax is incurred and, if so, the amount of liability.  G.L. c. 62C, § 25; 830 CMR 62C.25.1(1).  In the event a taxpayer's records are dispersed, disorganized or otherwise kept in such manner as to make it impossible to ascertain the proper amount of tax due without inordinate audit time, the Commissioner may require the taxpayer to organize and present the pertinent records in such form as to enable a determination of the amount of any such liability.  830 CMR 62C.25.1(3).  If the taxpayer is unwilling or unable to do so, the Commissioner may use any reasonable alternative method of determining the amount due.  Id.

A taxpayer’s books, records, papers and other data must be made available upon request.  G.L. c. 62C, §§ 24, 25.  To the extent a taxpayer maintains accounting records and information in electronic format, such records must be provided in a searchable electronic format if requested by the Commissioner.  Id.  Any additional reports and schedules relating to the preparation of tax returns must be maintained and made available upon request.  Id.[3]  See also 830 CMR 62C.25.1(12)(f) (requiring the retention of “supporting data to indicate how the figures in such [tax] returns were calculated”).  Any related inventory system as well as any additional purchase reports, schedules or documentation that reconcile to other books and records, such as purchase journals or a general ledger, must also be maintained and made available upon request.  Id.

All records must be kept so long as their contents are material in the administration of Massachusetts tax laws.  At a minimum, unless the Commissioner consents in writing to an earlier destruction, the records must be preserved until the statute of limitations for making additional assessments for the period for which the return was due has expired; generally, this is three years after the due date of the return or the date the return is actually filed, whichever occurs later.  See G.L. c. 62C, § 37; 830 CMR 62C.25.1(7).  The records must be made available to DOR upon request.  G.L. c. 62C, §§ 24, 25.  DOR may require a longer retention period, such as when the records are the subject of an audit, court case, or other proceeding.  830 CMR 62C.25.1(7).

Records may be considered inadequate if:

  • they do not verify sales receipts,
  • they do not verify whether those receipts are subject to sales tax,
  • they do not provide details of each individual transaction (summary reports and daily summary or "Z" tapes are not sufficient),
  • they do not verify the taxable status of purchases,
  • they do not show that a business's purchases correlate to its sales,
  • it is not possible to conduct a complete audit using those records,
  • they are not made available to the auditor,
  • they are not in a form that can be audited by DOR, or
  • an evaluation of the accounting system utilized discloses that the system does not provide adequate internal control procedures which assure the accuracy and completeness of the transactions recorded in the books and records (e.g., the lack of sequentially numbered invoices or guest checks, or the lack of dates on receipts).

See 830 CMR 62C.25.1(3).

If records are considered inadequate, DOR may utilize another audit methodology (such as sampling) to determine any additional taxes due, impose penalties and interest if additional tax is found to be due, and seek criminal penalties if it is determined that the failure to maintain proper records constitutes a willful attempt to evade or defeat payment of the tax due.  See G.L. c. 62C, § 73.

B.  Requirements For POS Systems
POS systems used by vendors include hardware and software used at the point a retail sale is completed.  For purposes of this Directive, POS systems include, but are not limited to, Database Management Systems, EDI technology, Machine-sensible records and similar systems. [4]  POS systems are increasingly being utilized to record and track sales to a business's customers and may be integrated with accounting modules, including general ledgers, accounts receivable, accounts payable, purchasing, and inventory control systems.  When using POS systems all sales and transactions are made through a computer system.  The system records what is being sold, the selling price, and the quantity sold.  It then calculates the total due, including tax, and how much change is due.

Each POS transaction record must provide enough detail to independently determine the taxability of each sale and the amount of tax due and collected.  G.L. c. 62C, § 25.  Detailed information required for each sales transaction includes, but is not limited to the:

  • individual item(s) sold,
  • selling price,
  • tax due,
  • invoice number,
  • date of sale,
  • method of payment, and
  • POS terminal number and POS transaction number.

The Department may request records retained in an electronic format from a taxpayer’s POS system as such records contain the details of each sales transaction which would provide verification of what was sold and whether the appropriate amount of tax was collected.[5]  Any and all documentation describing the automated data processing of the POS system must also be made available upon request.  Id.

In order to be considered complete, electronic records must permit the direct reconciliation of the receipts, invoices, and other source documents with the entries in the books and records and on the returns of a taxpayer.  If this reconciliation is not possible, the records may be deemed inadequate to permit a detailed audit and another audit methodology (such as a sampling) may be used.  830 CMR 62C.25.1(3).

Users of POS systems must maintain auditable internal controls to ensure the accuracy and completeness of the transactions recorded in the POS system.  Id.  The records must provide the opportunity to trace any transaction back to the original source or forward to a final total (i.e., audit trail details).  Id.  Audit trail details include, but are not limited to:

  • internal sequential transaction numbers;
  • records of all POS terminal activity; and
  • procedures to account for voids, cancellations, or other discrepancies in sequential numbering.
  • The POS audit trail or logging functionality must be activated and operational at all times, and it must record:
  • any and all activity related to other operating modes available in the system, such as a training mode; and
  • any and all changes in the setup of the system.

Failure to have the POS audit trail or logging functionality activated and performing these functions will be deemed evidence of a lack of POS system internal controls.

Entities that utilize a POS system that lacks the storage capacity to comply with the three-year retention period, must transfer, maintain, and have available in a machine-sensible and auditable form, any data that has been removed from the POS system.  Upon any change in POS systems, the data from the old system must be transferred, maintained, and available in a machine-sensible and auditable form.

C.  Sales Suppression Devices a/k/a “Zappers”
In the mid-1990s, software became available that would “zap” sales transactions from electronic cash registers or POS systems, thus giving the device the name “zapper.”  A zapper is an automated sales suppression device that is generally a software program carried on a memory stick or removable compact disc, accessed through an Internet link or other means that alters the electronic sales records in a cash register.

The use of “zappers” or any other means of willfully underreporting sales, whether in connection with the use of POS systems or otherwise, is illegal and will be subject to the tax evasion penalties of G.L. c. 62C, § 73, including a felony conviction, a fine of not more than $100,000 or $500,000 in the case of a corporation, or by imprisonment for not more than five years, or both, and payment of the costs of prosecution.
 

 

Mark E. Nunnelly
Mark E. Nunnelly
Commissioner of Revenue


MEN:RHF:ds

March 3, 2016

DD 16-1



[1] The terms “vendor” and “retailer” are as defined in G.L. c. 64H, § 1.  The term “contractor” means any person engaged in the construction, reconstruction alteration, remodeling, or repair of real property.
[2] Form ST-MAB-4, Sales Tax on Meals, Prepared Foods and Beverages Return.
[3] This Directive does not require a taxpayer to maintain accounting records and information in electronic format if it does not otherwise do so, nor does it require a taxpayer to use a specific electronic format that may be different than the format that it is currently using, provided that the information required by G.L. c. 62C, the Records Retention Regulation and this Directive is retrievable from the system.
[4] The Record Retention Regulation contains the following definitions:
Database Management System, a software system that controls, relates, retrieves, and provides accessibility to data stored in a database.
Electronic data interchange or EDI technology, the computer-to-computer exchange of business transactions in a standardized structured electronic format.
Machine-sensible record, a collection of related information in an electronic format. Machine-sensible records do not include hard-copy records that are created or recorded on paper or stored in or by an imaging system such as microfilm, microfiche, or storage-only imaging systems.  830 CMR 62C.25.1(2).
[5] See footnote 3 above.