Minimum Requirements for Recordkeeping

Section 130 Section 130.805 Minimum Requirements for Recordkeeping a)         In General. A taxpayer shall maintain all records that are necessary to determine the correct tax liability under the Retailers' Occupation Tax Act ("Act") [35 ILCS 120] .  All required records must be made available upon request by the Department. Where a taxpayer's business consists of the sale of tangible personal property at retail, the following records will be deemed by the Department to constitute a minimum for the purposes of the Act: 1) Cash register tapes, point-of-sale system printouts, and other data used to prepare returns, whether monthly, quarterly, or yearly depending on the taxpayer's filing status.  The monthly, quarterly, or yearly records shall have the capability to detail each transaction with sufficient "transaction-level records."  For purposes of this Section, "transaction-level records" means, at a minimum, the date of the transaction, invoice or transaction number, description of the items sold, the selling price, and the amount of tax or proper exempt status. 2)         A record of the amount of merchandise purchased.  To fulfill this requirement, copies of all vendors' invoices and taxpayers' copies of purchase orders must be retained serially and in sequence as to date. 3)         A true and complete inventory of the value of stock on hand taken at least once each year. 4)         Bank statements for all accounts associated with the business. 5)         Federal income tax returns, including all schedules, and all working papers used to prepare the federal income tax returns, including all Form 1099-Ks. 6)         Sales tax returns, including all schedules and working papers used to prepare the sales tax returns. 7)         Monthly statements supporting all Form 1099-Ks received (e.g., from marketplace facilitators, payment processors). 8)         Log of all cash disbursements to vendors, employees, and others. 9)         Documentation for exempt and other non-taxable receipts including such documentation as the name of the exempt entity, Illinois Account ID number, resale certificate, or records relating to sales in interstate commerce.  See 86 Ill. Adm. Code 130.120, 130.1405, and 130.2081(c). 10)       For sales requiring delivery, information detailing the purchaser's name, street address, city, state, and ZIP code for each sales transaction, and if shipped to an address other than the purchaser's, the name, street address, city, state, and ZIP code where delivery is made. 11)       Any records identified by the Department from a prior audit that the taxpayer was instructed to keep. 12)       The Department reserves the right to request any records necessary to complete verification, keeping in mind changes in technology and the retailer's specific business. b)         Records prepared by Automated Data Processing Systems ("ADP").  When an ADP tax accounting system is used to maintain all or part of a taxpayer's accounting or financial records, such ADP system must include a method of producing legible and readable records which will provide the necessary information for verifying tax liability.  If a taxpayer retains records required to be retained under Section 130.801 of this Part, in both machine-sensible and hard-copy formats, the taxpayer shall make the records available to the Department in machine-sensible format upon request of the Department in accordance with subsection (b)(5) of this Section.  ADP accounting systems encompass all types of data processing systems including, but not limited to, mainframe computer systems, stand-alone, or networked microcomputer systems, Database Management Systems ("DBMS"), and systems using Electronic Data Interchange ("EDI") technology. 1)         Definitions A)        "Database Management System" or "DBMS" means a software system that creates, 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)        "Machine-sensible record" means a collection of related information in an electronic format.  Machine-sensible records include, but are not limited to, data created by point-of-sale ("POS") systems or accounting software, Excel documents, and searchable portable document format ("PDF").  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 storage-only imaging systems. D)        "Storage-only imaging systems" means a system of computer hardware and software that provides for the storage, retention, and retrieval of documents originally created on paper , including but not limited to, static PDFs or joint photographic experts group ("JPEG") .  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. E)        "Hard-copy" means any documents, records, reports, or other data printed on paper. F)         "Point-of-sale ("POS") systems" means a system of computer hardware, software, or both that manages customer purchases, accepts payment, and provides receipts.  A POS is also how a retailer and a customer record a transaction. 2)         Recordkeeping Requirements - Machine-Sensible Records A)        General Requirements i)          Machine-sensible records used to establish tax compliance shall be retained by the taxpayer.  The retained records shall provide sufficient information to establish matters required to be shown by a taxpayer in any tax or information returns.  The machine-sensible records shall contain sufficient "transaction-level records" as defined in subsection (a)(1) so that the details and the source documents underlying the machine-sensible records can be identified and made available to the Department upon request. ii)         The retained records should reconcile to the books and to the tax return by establishing the relationship (e.g., the audit trail) between the total of the amounts in the retained records to the totals in the books and to the tax return. iii)        The retained records must be capable of being processed.  For purposes of this Section, "capable of being processed" means to be able to retrieve, manipulate, print hard-copy, or produce other output.  This term does not encompass any requirement that the program or system that created the computer data be available to process the data unless the process is essential to a tax-related computation. iv)        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. v)         All records required to be retained under this Section shall be preserved unless the Department has provided in writing that the records are no longer required as explained in Section 130.825 of this Part. B)        Electronic Data Interchange ("EDI") i)          Where a taxpayer uses EDI processes and technology, the level of record detail, in combination with other records related to the transaction, must satisfy the minimum "transaction-level records" requirement as detailed in subsection (a)(1) . Taxpayer may use codes to identify some or all of the data elements, as long as the taxpayer provides a method that allows the Department to interpret the coded information. ii)         The taxpayer may capture the information necessary to satisfy subsection (b)(2)(B)(i) 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. EXAMPLE:  A taxpayer using EDI 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. Neither the EDI transaction nor the accounts payable system captures information from the invoice pertaining to the product description or the vendor name (i.e., they contain only codes for that information).  Therefore, 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. If the taxpayer does this , the taxpayer need not retain its EDI transaction for tax purposes. C)        Electronic Data Processing Systems Requirements.  The requirements for an electronic data processing accounting system are 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 Section. 3)         Recordkeeping Requirements - ADP Systems Documentation A)        Upon the request of the Department, the taxpayer shall provide a description of the business process that created the retained records.  Such description shall include the relationship between the records and the tax documents prepared by the taxpayer and the measures employed to ensure the authenticity and integrity of the records. B)        The taxpayer shall be capable of demonstrating: i)          the functions being performed as they relate to the flow of data through the system; ii)         the internal controls used to ensure accurate and reliable processing; and iii)        the internal controls used to prevent the unauthorized addition, alteration, or deletion of retained records. C)        The following specific documentation is required for machine-sensible records pursuant to this Section: i)          record formats and layouts; ii)         field definitions, including the meaning of all "codes" used to represent information; iii)        file descriptions (e.g., data set name); and iv)        detailed charts of accounts and account descriptions. D)        Any changes to the items specified in subsections (b)(3)(B) and (C) above, together with their effective dates, shall be documented and made available to the Department upon request. 4)         Machine-Sensible Records Maintenance Requirements A)        The establishment of records management practices is solely at the discretion of the taxpayer, who ultimately bears the burden of producing records capable of being processed at the time of an examination by the Department.  The Department recommends but does not require that taxpayers refer to the National Archives and Record Administration's ("NARA") standards for guidance on the maintenance and storage of electronic records. B)        In establishing records management practices, taxpayers should consider the following to maintain the integrity of the records: the labeling of records, the security of the storage environment, the creation of back-up copies and their storage location, and the use of periodic testing. C)        The NARA standards may be found at 36 CFR 1234, July 1, 1995 edition. D)        The taxpayer's computer hardware or software shall accommodate the processing of or the extraction and conversion of retained machine-sensible records. 5)         Access to Machine-Sensible Records.  The manner in which the Department is provided access to machine-sensible records as required in subsection (b) of this Section and Section 130.801(d) of this Part may be satisfied through a variety of means that shall , after consultation with the taxpayer, take into account the taxpayer's individual circumstances.  Such access will be provided in one or more of the following manners: A)        A taxpayer may provide the Department copies of the machine‑sensible records for use on the Department's equipment; B)        The taxpayer may arrange to provide the Department with the hardware, software, and personnel resources necessary to access and process the machine-sensible records; C)        The taxpayer may arrange for a third party to provide the hardware, software, and personnel resources necessary to access and process the machine-sensible records; D)        The taxpayer may convert machine-sensible records to a standard electronic record format specified by the Department.  These records may be processed on the Department's equipment or at the taxpayer's location; or E)        The taxpayer and the Department may agree on other means of providing access to the machine-sensible records. 6)         Taxpayer Responsibility and Discretionary Authority A) Taxpayers are responsible for determining which of their machine-sensible records must be retained and which records may be discarded.  These determinations require a consideration of all the facts and circumstances, including whether duplicated or redundant records exist. B)        In general, taxpayers should retain the machine-sensible records that are the most direct evidence of the transactions and have discretion to discard duplicated records and redundant information.  In exercising this discretion, the taxpayer should generally retain those records that best facilitate the retrieval and processing of the data during an audit.  For example, departmental records stored in departmental data files that are duplicated in a central system could be discarded provided that all required information in the departmental records is contained in the central system and the requirements of this Section are met.  Similarly, daily or weekly data files could be discarded provided that appropriate monthly, quarterly, or annual data files with the ability to access appropriate transaction-level records are available. C)        In conjunction with meeting the requirements of this Section, a taxpayer may create files solely for the use of the Department.  For example, if a database management system is used, it is consistent with this Section for the taxpayer to create and retain a file that contains the transaction-level detail from the database management system and that meets the requirements of the Section.  The taxpayer should document the process that created the separate file to show the relationship between that file and the original records. D)        A taxpayer may contract with a third party to provide custodial or management services of the records.  Such a contract shall not relieve the taxpayer of its responsibilities under this Section. c)         Alternative Storage Media.  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 Section to storage-only imaging systems , such as static PDFs or JPEGs, and may discard the original hard-copy documents, provided the conditions of this Section are met.  These records are not a substitute for machine-sensible records described in subsection (b) of this Section.  Documents which may be stored on these media include, but are not limited to, general books of account, journals, voucher registers, general and subsidiary ledgers and supporting records of details, such as sales invoices, purchase invoices, exemption certificates, and credit memoranda. Storage-only imaging systems shall meet the following requirements: 1)         Documentation establishing the procedures for converting the hard-copy documents to storage-only imaging systems must be maintained and made available upon request.  Such documentation shall, at a minimum, contain 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. 2)         Procedures must be established for the effective identification, processing, storage, and preservation of the stored documents and for making them available for the periods they are required to be retained under the Retailers' Occupation Tax Act [35 ILCS 120]. 3)         All data stored on storage-only imaging systems must be maintained and arranged in a manner that permits the location of any particular record. 4) Storage-only imaging systems records must be indexed, cross-referenced, and labeled to show beginning and ending numbers or beginning and ending alphabetical listing of documents included, and must be systematically filed to permit the immediate location of any particular record. A posting reference must be on each document and a control log or catalog of such documents must be maintained. 5)         Upon request of the Department, a taxpayer must provide facilities and equipment, in good working order, for reading, locating, and reproducing any documents maintained on storage-only imaging systems. 6)         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 recognized as words or complete numbers. 7)         There must be no substantial evidence that the storage-only imaging systems lack authenticity or integrity. d)         Effect on Hard-Copy Recordkeeping Requirements 1)         Except as otherwise provided, the provisions of this Section 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.  Hard-copy records may be retained on a recordkeeping medium provided in subsection (c). 2)         If hard-copy records are not produced or received or required to be produced or received in the ordinary course of transacting business (i.e., when the taxpayer uses electronic data interchange technology), such hard-copy records need not be created. 3)         Unless hard-copy records are required to be provided or received, hard‑copy records generated at the time of a transaction need not be retained if all the details relating to the transaction are subsequently received by the taxpayer in an EDI transaction and are retained by the taxpayer in accordance with this Section. 4)         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 Section.  Such details include, but may not be limited to, those listed in subsection (b)(2)(B). 5)         Computer printouts that are created for validation, control, or other temporary purposes need not be retained. 6)         Nothing in this Section shall prevent the Department from requesting hard-copy printouts of retained machine-sensible records.  These requests may be made either at the time of an examination or in conjunction with the testing described in Section 130.825 of this Part.