Sales Tax Audit
Sales Tax Audit
States and cities are increasing sales tax audits as a source to help fund budget shortfalls.
Transactional tax bases are expanding and more items and services are becoming taxable. Eventually, you will come under audit at some point in your business cycle. Audits may cover periods of three or more years back. Most states will use “triggers” for sales tax audit targets, yet still systematically select businesses for audit by random statistics.
Being prepared before the audit is initiated is the best defense for a good audit outcome. Here are some things to remember throughout the year to help minimize audit exposure.
In most states, all sales transactions are taxable, unless specifically exempted. This has to be the one of the most common oversights in determining taxability. Some states, such as Arizona, Texas and Washington, have taxable classifications, each with its’ own set of rules for rates, taxability and exemptions. Some exemptions are by statute; others require documentation such as a certificate or letter. Also, some exemptions need to be renewed or are set for a defined time period. Others are until the business is discontinued. When operating a business in multiple states, these classifications and rules can become very complicated and difficult to monitor. Analyzing these classifications and collections internally will aid in preparing for an audit.
Common sales tax audit pitfalls include:
- Charging the wrong rate due to missed rate changes
- Use tax accruals and reporting
- Exemptions and resale certificates
- Unique rules and regulations
- Internet sales
- Location of sale
- Nexus applicability
- Sales tax liability record keeping
Common proactive tips prior to a sales tax audit:
- Good documentation of processes and procedures
- Run a preliminary internal audit to determine possible weakness areas
- Review tax classifications and their relevance to your business
- Keep up with nexus rules and regulations
- Documentation of exemption and resale certificates
- Consistency in processes
Auditors look to see what processes a company uses to remain current and compliant. Consistency in timely filing, paying and reporting returns and reports help to establish a compliance pattern. Provide proof to an auditor of tax research tools used to keep current on new events. Keep documentation in an orderly manner so the auditor can follow and understand the process. All of these details can help mitigate any audit findings. Just because you come under audit does not necessarily mean you will be paying lots of dollars; you just have to spend time and resources in proving that you are doing everything right and in compliance.
Visit this page to see tax changes that have taken effect as of January 2016.
Laura Hoffman
Transactional tax bases are expanding and more items and services are becoming taxable. Eventually, you will come under audit at some point in your business cycle. Audits may cover periods of three or more years back. Most states will use “triggers” for sales tax audit targets, yet still systematically select businesses for audit by random statistics. Being prepared before the audit is initiated is the best defense for a good audit outcome. Here are some things to remember throughout the year to help minimize audit exposure. In most states, all sales transactions are taxable, unless specifically exempted. This has to be the one of the most common oversights in determining taxability. Some states, such as Arizona, Texas and Washington, have taxable classifications, each with its’ own set of rules for rates, taxability and exemptions. Some exemptions are by statute; others require documentation such as a certificate or letter. Also, some exemptions need to be renewed or are set for a defined time period. Others are until the business is discontinued. When operating a business in multiple states, these classifications and rules can become very complicated and difficult to monitor. Analyzing these classifications and collections internally will aid in preparing for an audit. Auditors look to see what processes a company uses to remain current and compliant. Consistency in timely filing, paying and reporting returns and reports help to establish a compliance pattern. Provide proof to an auditor of tax research tools used to keep current on new events. Keep documentation in an orderly manner so the auditor can follow and understand the process. All of these details can help mitigate any audit findings. Just because you come under audit does not necessarily mean you will be paying lots of dollars; you just have to spend time and resources in proving that you are doing everything right and in compliance. Transactional tax bases are expanding and more items and services are becoming taxable. Eventually, you will come under audit at some point in your business cycle. Audits may cover periods of three or more years back. Most states will use “triggers” for sales tax audit targets, yet still systematically select businesses for audit by random statistics. Being prepared before the audit is initiated is the best defense for a good audit outcome. Here are some things to remember throughout the year to help minimize audit exposure. In most states, all sales transactions are taxable, unless specifically exempted. This has to be the one of the most common oversights in determining taxability. Some states, such as Arizona, Texas and Washington, have taxable classifications, each with its’ own set of rules for rates, taxability and exemptions. Some exemptions are by statute; others require documentation such as a certificate or letter. Also, some exemptions need to be renewed or are set for a defined time period. Others are until the business is discontinued. When operating a business in multiple states, these classifications and rules can become very complicated and difficult to monitor. Analyzing these classifications and collections internally will aid in preparing for an audit. Auditors look to see what processes a company uses to remain current and compliant. Consistency in timely filing, paying and reporting returns and reports help to establish a compliance pattern. Provide proof to an auditor of tax research tools used to keep current on new events. Keep documentation in an orderly manner so the auditor can follow and understand the process. All of these details can help mitigate any audit findings. Just because you come under audit does not necessarily mean you will be paying lots of dollars; you just have to spend time and resources in proving that you are doing everything right and in compliance. Transactional tax bases are expanding and more items and services are becoming taxable. Eventually, you will come under audit at some point in your business cycle. Audits may cover periods of three or more years back. Most states will use “triggers” for sales tax audit targets, yet still systematically select businesses for audit by random statistics. Being prepared before the audit is initiated is the best defense for a good audit outcome. Here are some things to remember throughout the year to help minimize audit exposure. In most states, all sales transactions are taxable, unless specifically exempted. This has to be the one of the most common oversights in determining taxability. Some states, such as Arizona, Texas and Washington, have taxable classifications, each with its’ own set of rules for rates, taxability and exemptions. Some exemptions are by statute; others require documentation such as a certificate or letter. Also, some exemptions need to be renewed or are set for a defined time period. Others are until the business is discontinued. When operating a business in multiple states, these classifications and rules can become very complicated and difficult to monitor. Analyzing these classifications and collections internally will aid in preparing for an audit. Auditors look to see what processes a company uses to remain current and compliant. Consistency in timely filing, paying and reporting returns and reports help to establish a compliance pattern.
