Recordkeeping, POS, and Multi-State Risk
Part One on Sales Tax Audit Triggers showed what sparks a sales tax investigation; this next chapter shows you how to prepare for one. When the audit notice arrives, what matters isn’t just what happened; it’s what you can prove. The systems you use, the reports you save, and the way you expand your business all play a role in how exposed you are when the state comes knocking.
CPA Raffi Yousefian and sales tax expert and CPA Mark Stone dig into the nuts and bolts of audit readiness. From misconfigured POS systems to cross-border risk, they cover the behind-the-scenes mechanics that make or break your audit trail.
Recordkeeping – The One Thing You Can Control
No matter how complex your business gets, one thing remains squarely in your control: your records. In the eyes of an auditor, what matters isn’t just what you say you earned; it’s what your documentation proves. And yet, this is the area where many restaurants slip up. Disorganized folders, missing reports, and last-minute spreadsheets are all-too-common pitfalls.
Mark: The number one reason audits spiral out of control is bad recordkeeping. You’d be shocked how many people hand over a single spreadsheet and say, “Here’s everything.”
Raffi: And then it turns out the spreadsheet was updated manually every week, with no source backup.
Mark: Exactly. If you want to stay out of trouble, keep every report. POS summaries, payroll reports, vendor invoices, sales tax returns, everything. You need a full story, not just a snapshot.
Key takeaway: Clean records make for clean audits.
Top tip: Store your reports in one central place, labeled by month. If it takes you more than five minutes to find a file, your system needs work.
Why POS Systems Keep You Safer
A POS system isn’t just a tool for ringing up sales; it’s your front line in proving what happened in your restaurant. When configured correctly, it becomes a central source of truth that links your daily transactions with your payroll and tax records. In an audit, this can make all the difference.
Many restaurant owners invest in a POS for speed and efficiency, but few realize how critical it is from a compliance perspective. The system tracks what was sold, when, by whom, and at what price; all details that can validate your numbers or expose your gaps. If it’s not set up to capture sales tax correctly or distinguish between tips and service charges, it’s no better than a guess.
Raffi: Why do auditors trust POS data more than spreadsheets?
Mark: Because it’s time-stamped, locked in, and comes straight from the source. If your POS is set up correctly and linked to payroll and sales tax reporting, it’s hard to argue with.
Raffi: So it’s not just about having a POS, it’s about using it properly.
Mark: Exactly. The safest clients I work with are the ones who build their sales tax returns off POS exports, not off memory or estimation.
Key takeaway: Your POS is only as useful as its configuration.
Top tip: Audit your POS setup quarterly. Check that tax categories, item names, and tips/service charges are mapped correctly.
What Happens When the POS is Not Correct
Having no POS or a poorly configured one can cause more harm than having none at all.
Without itemized, time-stamped data, you’re left with guesswork. And in the eyes of an auditor, guesswork equals risk. A generic register, manual end-of-day totals, or staff-written logbooks might feel like “good enough” systems, but they create gaps you can’t explain when under scrutiny.
Many restaurants delay POS upgrades, thinking it’s just about convenience or speed. But when your tax return, sales reports, and bank deposits don’t align, the missing link is often a POS that wasn’t built to handle compliance. The result? Reconstructed records, inflated assessments, and a tax liability based on assumptions, not facts.
Raffi: It’s interesting because all of our clients have POS systems, right? That’s a bare minimum to work with us. The biggest problem is that they might have one, but it’s not set up correctly. And for the most part, it is—the food, the beverage, that stuff’s simple. They apply the sales tax, and you’re good. But where we see the most problems are cover charges, tickets, service charges, and room fees. So a big part of our onboarding process is making sure the POS is set up correctly.
Mark: I had a case where the owner used a basic register and entered totals manually at the end of each day. No itemization, no timestamps. We spent weeks recreating records.
Raffi: And the state won’t just shrug that off.
Mark: No. If your records aren’t credible, the state gets to estimate your tax bill based on whatever data they can find. And let me tell you–they don’t estimate low.
Key takeaway: Manual systems don’t hold up under scrutiny.
Top tip: If your POS doesn’t track itemized sales, upgrade now. You can’t defend what you can’t document.
Software Can Help, But It’s Not Foolproof
Sales Tax software is a great tool, but it’s still just a tool. Applications like Avalara, Davo, and others can automate filings, apply rates, and reduce human error, but they only work as well as the setup behind them. If the categories are wrong, the data input is inconsistent, or updates aren’t appropriately managed, the software will file incorrectly.
Many restaurant owners assume that using automation means they’re covered. But as Mark and Raffi point out, auditors don’t care if an error came from a human or a system; they just care that it’s wrong.
If your software misclassifies tips, bundles service charges into non-taxable items, or uses old product mappings, it’s not protecting you; it’s making your audit harder to defend.
Raffi: Many of these restaurants are starting to use a software called Avalara or Davo by Avalara to automate their sales tax filings. The software pulls all the data from the POS, withdraws the funds dailyy, files the sales tax returns, and there’s no manual intervention unless an integration is broken or something like that. Have you seen any issues with this?
Mark: Yeah, we’re actually an Avalara-certified partner, and we prepare sales tax returns, and we use Avalara’s software, and sometimes we help with installs on clients for Avalara. And the software works pretty well. What people need to remember is that it’s software. That doesn’t necessarily mean it’s right. People have to understand the distinction between something grabbing information out of the POS system and a professional reviewing it.
It works very well if you’re strictly just working from the POS. But when you have a restaurant that maybe gets into catering, gets into door charges, gets into other revenue streams that may not flow so nicely through the point-of-sale system, it may not be the right choice because you need a person to look at it.
AI and automation are just not there yet where it replaces a person. It’s helpful, but it’s not everything. So just be careful with that
Raffi: Plus the Use Tax, right? It doesn’t calculate it, and you’ve got to manually upload that, which if you want to do it a hundred percent correct.
Key takeaway: Software reduces risk, but doesn’t eliminate it.
Top tip: Review your tax software setup quarterly. And have a human double-check it.
Multi-State Expansion? Don’t Copy and Paste
Opening a new location is one of the most exciting milestones in a restaurant’s journey. It feels like proof that all your hard work is paying off. The buzz of a new build-out, hiring staff, testing menus in a new neighborhood, it’s easy to focus on the front-of-house excitement and overlook what’s happening behind the scenes.
But each state comes with its own tax traps. What worked perfectly in New York might be totally off the mark in New Jersey. Sales tax rules shift across state lines, and when your systems can’t adapt, your risk goes up fast.
This is where things often go sideways. Restaurant owners copy and paste their setup into a new state, only to find out they’re applying sales tax incorrectly to menu items in their POS. And once you’re doing business in another state, even just delivering food or catering an event, you might be on the hook to collect and remit tax there.
Mark: Every state has its own rules. I’ve seen people take their New York process, drop it into New Jersey, and suddenly they’re behind on filing, not charging the right tax, or missing registration altogether.
Raffi: Especially with delivery services, catering, or events–those things cross borders more than people realize.
Mark: And once you create nexus in another state, you’re on the hook. Ignorance isn’t a defense.
Key takeaway: Sales tax doesn’t travel well. Know the rules before you expand.
Top tip: Talk to your accountant before expanding. And not just the one who files your tax returns–the one who understands multi-state strategy.
Keep It, Back It Up, Don’t Assume
In a world where everything is online and automated, it’s easy to assume your records are safe.
But assumptions don’t hold up in an audit. Just because a report exists in your software or your bookkeeper had access once, doesn’t mean it will be there when you need it.
When systems change, people leave, or subscriptions lapse, vital information can vanish. When that happens, the burden is on you to produce the records, not on your software provider or payroll company.
Mark: Recordkeeping is extremely important—admission charges, tickets, vouchers—whatever records they keep. They can keep them electronically as long as they can be reproduced. You really have to keep at least four years’ worth of records. I tell people three years plus the current year. Seven is better. Everything is best.
And what I remind all of my clients—restaurants, pizzerias, whatever—is a POS system is just a computer. And in a restaurant, it’s usually a computer sitting next to a soda machine and a sink. And when computers get wet, they’re not happy. That stuff should be backed up religiously off-site every night. That’s a business thing for everybody.
But too many clients say, “It was my POS system, and it broke six months ago.” What’s the backup copy like?
Raffi: Yeah, exactly.
Mark: If I were playing with my laptop on the sink, I would expect it to break in over three years.
Raffi: Well, the good thing is that a lot of them are web-based now. So luckily, that’s changing.
Mark: Right. But even going back years with microsystems, when they had backups and online backups, a lot of times they backed up the data for 364 days. And then on the 365th day, it rewrote that day from the prior year. So you only had a year’s worth of data. Again, you need four years. People make a lot of assumptions about the data being backed up. You really should test those assumptions.
Say, “Today is May 30, 2025. I want to see my records from June 7, 2022.” See if they exist. Pull up that day. Test one day. Just test one day.
Raffi: Yeah, especially if you’re switching. People are switching POS and payroll providers very quickly these days.
Mark: And going out of business or selling your business does not relieve you of the obligation to keep those records for four years. I know you want to throw out all the paper and be done with it, but not until four years later.
Raffi: Yeah.
Key takeaway: You’re responsible for your records–even if a third party generated them.
Top tip: Download and archive your core reports monthly, payroll, POS, sales tax returns, and bank statements; never assume they’ll be there later.
Final Thought
Audits aren’t won with charm; they’re won with documentation. You don’t get credit for trying your best; you get assessed based on what you can prove. That means no shortcuts, no assumptions, and no ‘we thought someone else had it.’ From how your POS is configured to how your records are stored, every detail tells a story. And if that story is incomplete or inconsistent, the state will write its own ending.
A strong operational foundation won’t stop an audit from happening, but it will give you the confidence and the paper trail to survive it.
Next up: Part Three — Use Tax, Myths & Legal Landmines. We’ll dive into the most misunderstood part of sales tax compliance, and what a nightclub audit can teach every restaurant owner about fighting back.
