Current through Register Vol. 24-06, March 15, 2024
(1)
Introduction. This rule defines the requirements for the
maintenance and retention of books, records, and other sources of information.
It also addresses these requirements where all or a part of the taxpayer's
books and records are received, created, maintained, or generated through
various computer, electronic, and/or imaging processes and systems.
The general requirements imposed on taxpayers under
RCW
82.32.070 are to retain and make available
those records necessary to verify that the correct tax liability has been
reported and paid by the taxpayer with respect to the taxes administered by the
department of revenue (department). The records provided to the department are
confidential and privileged and may not be disclosed by the department, except
as provided by
RCW
82.32.330.
(2)
Definitions. For purposes of
this rule, the following definitions apply:
(a)
"Database management system"
means a software system that controls, relates, retrieves, and provides
accessibility to data stored in a database.
(b)
"Electronic data
interchange" or "EDI technology" means the
computer-to-computer exchange of business transactions in a standardized
structured electronic format.
(c)
"Hard copy" means any documents, records, reports or other data
printed on paper.
(d)
"Machine-sensible record" means a collection of related
information in any electronic format (e.g., database management systems, EDI
technology, automated data process systems, etc.). 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.
(e)
"Records" means all books, data, documents, reports, or other
information, including those received, created, maintained, or generated
through various computer, electronic, and/or imaging processes and
systems.
(f)
"Storage-only
imaging system" means a system of computer hardware and software that
provides for the storage, retention and retrieval of documents originally
created on paper. It does not include any system, or part of a system, that
manipulates or processes any information or data contained on the document in
any manner other than to reproduce the document in hard copy or as an optical
image.
(3)
Recordkeeping requirements-General.
(a)
Duty of taxpayer to keep
records. Every taxpayer liable for a tax or fee imposed by the laws of
the state of Washington for which the department has primary or secondary
administrative responsibility, e.g., Title 82 RCW, chapters 67.28 (hotel/motel
tax), 70A.205 (fee on tires), and 84.33 RCW (forest excise tax), must keep
complete and adequate records from which the department can determine the tax
liability of the taxpayer.
It is the duty of each taxpayer to prepare and preserve all
records in a systematic manner conforming to accepted accounting methods and
procedures. Records are to be kept and preserved and must be presented upon
request by the department or its authorized representatives. The records should
demonstrate:
(i) The amounts of gross
receipts and sales from all sources, however derived, including barter or
exchange transactions, whether or not such receipts or sales are taxable. These
amounts must be supported by original source documents or records including but
not limited to all purchase invoices, sales invoices, contracts, and such other
records as may be necessary to substantiate gross receipts and sales.
(ii) The amounts of all deductions,
exemptions, or credits claimed through supporting records or documentation
required by statute or administrative rule, or other supporting records or
documentation necessary to substantiate the deduction, exemption, or
credit.
(iii) The payment of retail
sales tax or use tax on capital assets, supplies, articles manufactured for
your own use, and other items used by the taxpayer as a consumer.
(iv) The amounts of any refunds claimed.
These amounts must be supported by records as may be necessary to substantiate
the refunds claimed. Refer to WAC
458-20-229 Refunds, for
information on the refund process.
(b)
Types of records. The
records kept, preserved, and presented must include the normal records
maintained by an ordinary prudent business person. These records may include
general ledgers, sales journals, cash receipts journals, bank statements, check
registers, and purchase journals, together with all bills, invoices, cash
register tapes, and other records or documents of original entry supporting the
books of account entries. The records must include all federal and state tax
returns and reports and all schedules, work papers, instructions, and other
data used in the preparation of the tax reports or returns.
(c)
Format of records. If a
taxpayer retains records in both machine-sensible and hard-copy formats, they
must make the records available to the department in machine-sensible format
upon request of the department. However, the taxpayer is not prohibited from
demonstrating tax compliance with traditional hard-copy documents or
reproductions, although this does not eliminate the requirement that they
provide access to machine-sensible records, if requested.
Machine-sensible records used to establish tax compliance must
contain sufficient transaction-level detail information so that the details
underlying the machine-sensible records can be identified and made available to
the department upon request.
At the time of an examination, the retained records must be
capable of being retrieved and converted to a readable record format, as
required in subsection (6) of this rule.
Taxpayers are not required to construct machine-sensible
records other than those created in the ordinary course of business. A taxpayer
who does not create the electronic equivalent of a traditional paper document
in the ordinary course of business is not required to construct such a record
for tax purposes.
(4)
Record retention period. All
records must be open for inspection and examination at any time by the
department, upon reasonable notice, and must be kept and preserved for a period
of five years.
RCW
82.32.070.
(5)
Failure to maintain or disclose
records. Any taxpayer who fails to comply with the requirements of
RCW
82.32.070 or this rule is forever barred from
questioning, in any court action or proceedings, the correctness of any
assessment of taxes made by the department based upon any period for which such
books, records, and invoices have not been so kept, preserved, or disclosed.
RCW
82.32.070.
(6)
Electronic records.
(a)
Electronic data interchange
requirements.(i) Where a taxpayer uses
electronic data interchange (EDI) processes and technology, the level of record
detail, in combination with other records related to the transactions, must be
equivalent to that contained in an acceptable paper record. For example, the
retained records should contain such information as vendor name, invoice date,
product description, quantity purchased, price, amount of tax, indication of
tax status, shipping detail, etc. Codes may be used to identify some or all of
the data elements, provided that the taxpayer provides a method which allows
the department to interpret the coded information.
(ii) The taxpayer may capture the information
at any level within the accounting system and need not retain the original EDI
transaction records provided the audit trail, authenticity, and integrity of
the retained records can be established. For example, a taxpayer using
electronic data interchange technology receives electronic invoices from its
suppliers. The taxpayer decides to retain the invoice data from completed and
verified EDI transactions in its accounts payable system rather than to retain
the EDI transactions themselves. Since neither the EDI transaction nor the
accounts payable system captures information from the invoice pertaining to
product description and vendor name (i.e., they contain only codes for that
information), the taxpayer must also retain other records, such as its vendor
master file and product code description lists and make them available to the
department. In this example, the taxpayer need not retain its EDI transaction
for tax purposes if the vendor master file contains the required
information.
(b)
Electronic data processing systems requirements. The requirements
for an electronic data processing accounting system should be similar to that
of a manual accounting system, in that an adequately designed accounting system
should incorporate methods and records that will satisfy the requirements of
this rule.
(c)
Internal
controls.
(i) Upon the request of the
department, the taxpayer must provide a description of the business process
that created the retained records. Such description must include the
relationship between the records and the tax documents prepared by the taxpayer
and the measures employed to ensure the integrity of the records.
(ii) The taxpayer must be capable of
demonstrating:
(A) The functions being
performed as they relate to the flow of data through the system;
(B) The internal controls used to ensure
accurate and reliable processing; and
(C) The internal controls used to prevent
unauthorized addition, alteration, or deletion of retained records.
(iii) The following specific
documentation is required for machine-sensible records retained pursuant to
this rule:
(A) Record formats or
layouts;
(B) Field definitions
(including the meaning of all codes used to represent information);
(C) File descriptions (e.g., data set name);
and
(D) Detailed charts of accounts
and account descriptions.
(7)
Access to machine-sensible
records.
(a) The manner in which the
department is provided access to machine-sensible records may be satisfied
through a variety of means that take into account a taxpayer's facts and
circumstances through consultation with the taxpayer.
(b) Access will be provided in one or more of
the following manners:
(i) The taxpayer may
arrange to provide the department with the hardware, software and personnel
resources to access the machine-sensible records.
(ii) The taxpayer may arrange for a third
party to provide the hardware, software and personnel resources necessary to
access the machine-sensible records.
(iii) The taxpayer may convert the
machine-sensible records to a standard record format specified by the
department, including copies of files, on a magnetic medium that is agreed to
by the department.
(iv) The
taxpayer and the department may agree on other means of providing access to the
machine-sensible records.
(8)
Storage-only imaging
systems.
(a)
Converting
documents. For purposes of storage and retention, taxpayers may convert
hard-copy documents received or produced in the normal course of business and
required to be retained under this rule to microfilm, microfiche or other
storage-only imaging systems and may discard the original hard-copy documents,
provided the conditions of this rule are met. Documents which may be stored on
these media include general books of account, journals, voucher registers,
general and subsidiary ledgers, and supporting records of details, such as
sales invoices, purchase invoices, exemption certificates, credit memoranda,
etc.
(b)
System
requirements. Microfilm, microfiche and other storage-only imaging
systems must meet the following requirements:
(i) Documentation establishing the procedures
for converting the hard-copy documents to microfilm, microfiche or other
storage-only imaging system must be maintained and made available upon request.
Such documentation must, at a minimum, contain a sufficient description to
allow an original document to be followed through the conversion system as well
as internal procedures established for inspection and quality
assurance.
(ii) Procedures must be
established for the effective identification, processing, storage, and
preservation of the stored documents and for making them available for a period
of five years.
(iii) Upon request
by the department, a taxpayer must provide facilities and equipment for
reading, locating, and reproducing any documents maintained on microfilm,
microfiche or other storage-only imaging system.
(iv) When displayed on such equipment or
reproduced on paper, the documents must exhibit a high degree of legibility and
readability. For this purpose, legibility is defined as the quality of a letter
or numeral that enables the observer to identify it positively and quickly to
the exclusion of all other letters or numerals. Readability is defined as the
quality of a group of letters or numerals being recognizable as words or
complete numbers.
(v) All data
stored on microfilm, microfiche or other storage-only imaging systems must be
maintained and arranged in a manner that permits the location of any particular
record.
(vi) There must be no
substantial evidence that the microfilm, microfiche, or other storage-only
imaging system lacks authenticity or integrity.
(9)
Hard-copy records.
(a)
Recordkeeping requirements.
The provisions of this rule do not relieve taxpayers of the responsibility to
retain hard-copy records that are created or received in the ordinary course of
business as required by existing law and regulations, except as otherwise
provided in this rule. Hard-copy records may be retained on a recordkeep-ing
medium as provided in subsection (8) of this rule. The department may request
hard-copy printouts in lieu of retained machine-sensible records at the time of
examination.
Hard-copy records not produced or received in the ordinary
course of transacting business (e.g., when the taxpayer uses electronic data
interchange technology), do not need to be created. Computer printouts that are
created for validation, control, or other temporary purposes do not need to be
retained.
(b)
Debit
and credit card transactions. Hard-copy records generated at the time of
a transaction using a credit or debit card must be retained unless all the
details necessary to determine correct tax liability relating to the
transaction are subsequently received and retained by the taxpayer in
accordance with this rule.
(10)
Out-of-state businesses. An
out-of-state business which does not keep its necessary records within this
state may either produce these records within this state as required for
examination by the department or permit the examination of all of its records
by the department or its authorized representatives at the place where the
records are kept.
RCW
82.32.070.
Statutory Authority:
RCW
82.32.300 and
82.01.060(2).
07-04-100, § 458-20-254, filed 2/6/07, effective 3/9/07. Statutory
Authority:
RCW
82.32.300. 89-11-040 (Order 89-6), §
458-20-254, filed 5/16/89.