Most companies can expect to be audited at some point, so it’s important to have a plan for when this inevitably happens.
You can get flagged for a sales tax audit for a variety of reasons. These include sales volume, high volume of exempt sales, errors on sales tax returns or consistent late filing, and having a previous state audit. Having remote employees or an office in the state can make it more likely to be subjected to an audit. You can also be flagged at random.
You can begin preparing now to reduce your exposure. The first step is to understand what to expect in the sales tax audit process, then learn what you can do to prepare and limit your liability. This can save you and your team valuable time down the road, too.
Being unprepared for sales tax exposure can be as costly and tricky to manage as failing to abide by payroll tax requirements.
How does the auditor identify sales tax outstanding?
The goal of a sales tax audit is to determine if sales and/or use tax was under-reported to the state. To do this, the auditor will review your sales tax returns, general ledger, chart of accounts, invoices, exemption and resale certificates, income tax returns, and financial statements. A big red flag for auditors can be if the gross sales reported on sales and use tax returns do not match gross revenue reported on your income tax returns.
How much will I owe?
Whether or not you are registered and have been collecting tax and filing returns in the jurisdiction will make a huge difference in how much you could expect to owe. If you have registered and have been filing timely returns, the statute of limitations is 3-5 years. If you have never registered with the state, the audit period could go back as far as when you originally gained nexus in the jurisdiction.
Who is responsible for the sales tax due?
The short answer is you, the seller. Some startups attempt to pass off the burden of sales tax on to the customer vis-à-vis their Terms & Conditions. However, as the seller, you are responsible for remitting the correct amount of sales tax to the state. If you have not been collecting and remitting sales tax from your customers, you are on the hook to pay the sales tax that is due.
Can I reduce my sales tax due?
You may be able to lessen the amount you owe by checking whether your customers have paid use tax to the state, as well as whether any of your customers are tax-exempt or resellers. If you find any customers in these categories, you will need documentation to prove that sales tax has already been addressed for these transactions.
Mitigate risk before you get notified
If you have not been notified of an audit yet, there are still things you can do to prepare. The most important thing you can do to mitigate your risk is to plan ahead.
- Make sure you are compliant: Check that you’re registered to pay sales tax in all the jurisdictions where you have nexus and that you have been filing returns in these places.
- Make sure you are remitting: If you are collecting sales tax the most important thing for you to do is remit the taxes at the next return due date. Collecting without remitting is against the law.
- Keep good records: Ask your customers for valid exemption and resale certificates and hang onto these documents to present to auditors when requested. Keep these documents organized so you can see when they expire.
- Limit your liability: If you think you might owe tax and haven’t registered yet, determine if there are amnesty programs or voluntary disclosure agreements (VDAs), which limit lookback periods and may waive penalties. These options can limit the interest and penalties you’ll owe.
Sales tax management is a necessity for every retail business. If you ignore it and simply write it off as a liability in your books, sooner or later the authorities will catch up with you and serve you a big (and should-have-been-avoidable) bill. Get your management process set up right away and maintain it vigilantly as your business grows. An automated sales tax solution like Anrok can help.
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