Georgia Sales Tax Audit Sampling Methodology Explained

Why Georgia Auditors Push So Hard for a Signed Sampling Agreement

There is a lot of pressure on taxpayers to sign agreements during the sampling process. That may not be the auditors’ true intent. However, what I have seen time and time again is auditors use every available means to push an agreement on taxpayers, knowing fully well that an agreement signed by the taxpayer will benefit the Department. Taxpayers have very little reason to sign.

The “Best Information Available” Standard Behind Every Push to Sample

Georgia's Taxpayer Bill of Rights states that the Department is required to provide an assessment based on the best information available if a taxpayer is unable to provide information showing the correct amount of tax owed. This authority is found in O.C.G.A. § 48-1-9. Most people are unaware just how important this section is.

The authority in O.C.G.A. § 48-1-9 requires the Department reach a conclusion as to the unsuitability of a taxpayer’s records prior to exercising sampling authority. Most taxpayers never reach this point; the sampling agreement is presented as routine paperwork. Once you understand the Section 48-1-9 threshold is the determination of the suitability of a taxpayer’s records, as opposed to an absolute right to sample, you have a significant lever most taxpayers never have.

What the Department Gains When You Sign

Sampling agreements are signed to facilitate an audit. A sampling agreement takes a very short sample from the population. The auditors then take a small sample of that population, perform tests, determine the sampling error, and, using statistical models, apply that error to the entire population. The auditors use samples to approximate the entire population. For public companies, the period sampled can be a three year window. Staffing and inventory problems, slow periods, and other nuances can be overlooked when making a sampling assessment. Given what is sampled, auditors can come to conclusions that may not be representative of the entire business. For financial reporting, the errors may not be material.

Why There Is Rarely a Reason to Sign On the Spot

The biggest sampling mistake is the lack of consideration about whether to sign an agreement. Signing it “locks” you in. There is no real negatives to not signing, and I mean that. It helps the Department. It does not help the taxpayer’s case.

Nobody has to sign anything the moment it is placed in front of them. The idea that there is pressure to sign then and there, with the auditor standing over you, is itself telling.

If you have not signed a sampling agreement and have a copy of it, please contact Sales Tax Helper or call (866) 458-7966 before signing it. That call will not cost you anything. Signing the wrong agreement could cost you and your company hundreds of thousands of dollars.

What a Georgia Sampling Agreement Actually Locks You Into

New York is not the only state where this plays out. In New York, a signed sampling agreement can become binding under case law once the Department has relied on it and substantially completed the test period review. Georgia gets there through statutory estimation power rather than a waiver doctrine built on a singular controlling case, but the end result is more or less the same. Signing the consent typically means you understand that providing a sample to the Department can satisfy your right to review the records. That’s something that can’t really be un-said later.

How a Short Test Period Gets Projected Across Your Full Audit Period

The math is relatively simple and uncomplicated. The convenience and simplicity is one of the main issues with the sample period being tested and extrapolated to represent the entire audit period. A couple of mistakes during a hectic couple of months can transform a small potential liability to a large one. An eight week sample that happens to catch an unusually high spike in untaxed sales, a record keeping lapse, a bad vendor month, is tested and interpreted to represent the taxpayer’s entire business for a three year span. In reality that isn’t the case the large majority of the time.

The Industries Georgia Targets Most for Sample-Based Audits

I have worked numerous audits in my career. Construction, gas stations, car dealerships, hospitality, and restaurants, tend to have higher volume, smaller transactions, and more cash components. More often than not, this leads to a greater number of questions regarding exemptions. These can make a complete, full, transaction by transaction analysis time consuming for the Department of Revenue. Sampling becomes the choice of tool. If your business resides in one of these industries, there's a good chance you are going to hear about sampling early in the process. Restaurant audits in New York follow a similar shape, where a data gap gets built into an assessment before the owner understands what is happening. Industries change by state. The mechanics of sampling do not.

If your business is in one of these industries, you can create a free account with Sales Tax Helper to review your documentation and understand your sampling exposure before an auditor raises it.

When the Sample Period Is Actually Challengeable

A sample period can be challenged if it does not reflect the entire audit period. There have been times when we were able to provide evidence showing the sample does not represent the full audit and that was the real opening, whether we had already signed the agreement or were deciding whether to challenge the sample methodology.

Proving the Test Period Was Not Representative

Representativeness is a fact question, meaning the answer to that question is won with supporting evidence rather than with an argument. If the sample period included a month during which you lost a major employee, switched your point of sale system, conducted a one-time promotion, or experienced a significant swing in your exempt sales, that is a legitimate challenge to the sample methodology. The objective is to demonstrate to the auditor and if necessary to a reviewer above the auditor that the sample period does not adequately represent your business during the audit period.

The strength is in the facts of your business and the Department’s assessment standards. A well documented challenge carries significant weight to a reviewer regardless of the presence or absence of controlling case law.

The Records That Make or Break This Argument

The winning records in these cases show what happened outside of the test period. This could include point of sale reports, staffing schedules, vendor invoices and bank statements. In my experience, the strongest challenges were built using records the business already had, but in a way that told a clear story about why the sample tested does not depict the rest of the audit period.

The Right Way to Respond Once You Have a Sampling Agreement in Hand

I see a theme in each of these cases: do not over provide documentation. Know what you are signing before you sign it. Don’t give up rights if you don’t have to. Be responsive to what the Department asks for, but nothing more.

Be Responsive, Not Generous With Your Records

Cooperating with an audit and handing over more than the Department asked for are two different things, and businesses mix them up constantly. Every extra record you produce beyond what was requested becomes something the auditor can use to build a bigger assessment, not just verify a smaller one. Respond to what is actually requested. On time. Completely. Resist the urge to explain yourself with documents nobody asked to see in the first place.

Know the Clock You Are Actually On

If an audit concludes with a Notice of Proposed Assessment, the Georgia Department of Revenue’s own published Taxpayer Bill of Rights allows you to file a protest within 45 days from the date of that Notice. The 45 day window is very strict, and the clock doesn’t start on the day you actually receive and open the letter. In fact, missing that deadline can allow the Department to issue an Official Assessment and proceed to issue a Demand for Payment. Again, if you do not pay or appeal that within 45 days, a State Tax Execution can be issued, which is a lien against your property, and 20% is added on to everything that has been assessed.

If you have anything with a deadline printed across the top, i.e. sampling agreements or assessment notices, contact Sales Tax Helper at (866) 458-7966. The first call is free, and the 45 day window will not stop while you make that call.

A sampling agreement in a Georgia sales tax audit is not paperwork you can skim and sign. It decides whether your assessment reflects your actual business or a projection built out of a couple of weeks that may not represent the rest of your year. You are often given an opportunity to have a representative test period to demonstrate that the assessment is not representative. Was the test period representative is the question we ask when a client signs a sampling agreement, or already signed one and wants to know what is next. Our team guides clients in Georgia sales tax audits from start to finish, and the earlier we get involved, the wider the array of options available.

Frequently Asked Questions

Do I have to sign a sampling agreement during a Georgia sales tax audit?

You are not obligated to sign a sampling agreement during a Georgia sales tax audit. You are under no legal obligation to sign the sampling agreement at any time. The Department of Revenue has the authority to estimate your potential tax liability from other sources, not from your agreement to a sample. You should review the sampling agreement with your legal counsel before signing.

Should I hire an attorney to review a sampling agreement before I sign it?

Yes. The attitude and actions of the Department of Revenue changes substantially after you sign a sampling agreement. The Department uses the sampling agreement to set the boundaries for the rest of the audit and, later, to justify decisions it made for you. Once you sign a sampling agreement, you lose significant leverage to challenge the sampling agreement, and it becomes very difficult to set the Department of Revenue back to the point before the agreement was signed. A short telephone call with an attorney to review the sampling agreement is in your best interests and is not likely to cost you any money.

What happens if I do not sign a sampling agreement with the Georgia Department of Revenue?

The Department of Revenue can decide to move to estimate your tax liability, but you will have a better challenge to that determination without a signed sampling agreement. Not signing the sampling agreement gives you the best chance to challenge the sampling agreement and set the parameters for the sampling period. This does not prevent the Department of Revenue from moving to estimate your tax liability. It simply gives you more opportunities to challenge the sample period and sampling agreement.

How can I tell if the Georgia audit sample period is fair?

Look at the sample window along with the rest of your audit period and identify anything unusual. Think along the lines of: was there staffing changes? was the business using a different system? was the business promoted? was there a disruption by a vendor? was there an increase/decrease of sales that was exempt? The test period being unusual is the basis for a representativeness challenge. The records that document the challenge is what makes the case.

I signed the Georgia sampling agreement, what records should I start collecting?

Anything that shows a normal stretch of business around the test window, think of things like: Point of Sale (POS) Reports, Staffing Schedules, Vendor Invoices/Exemption Certificates, and Bank Statements (pre and post sample period). Signing the agreement doesn't waive you right to challenge if that particular window is representative of the whole audit period, and these records are what make that case.

What is the time limit to protest a Georgia sales tax assessment?

According to the Department of Revenue’s Taxpayer Bill of Rights, only 45 days from the date on the Notice of Proposed Assessment. The same 45-day window applies to appealing an assessment to the Georgia Tax Court or the superior court. That time limit begins when notice is provided; no other date is relevant.

Is it possible for the Georgia Department of Revenue to estimate my sales tax liability, if my sales records are incomplete?

Yes, it is. O.C.G.A. § 48-1-9 states that if the Department decides that your records do not allow for an accurate determination of the taxes due, it must estimate your tax liability using the best information available. Whether your records actually meet that threshold in the first place and whether the sample the Department uses is representative, are both worth challenging rather than accepting it at face value.

This article is provided for general informational purposes only by Sales Tax Helper and does not constitute legal, tax, or accounting advice, and does not create an attorney-client relationship. Georgia sales tax laws are complex and subject to change. Contact Sales Tax Helper or a qualified tax professional for guidance specific to your situation.

About the Author

Gerald J. “Jerry” Donnini II is a sales tax attorney and the founder of Sales Tax Helper, a national platform that helps businesses find, fix, and prevent sales tax exposure before it becomes a problem. Over a 15-year career, he has represented businesses in more than 5,000 sales tax audits, appeals, and disputes across 40+ states. He holds an LLM in Taxation from New York University, is co-author of a CCH treatise on state sales and use tax, and serves as an adjunct law professor. Jerry has saved businesses more than $500 million in sales tax assessments. His framework, Find It. Fix It. Defend It., guides businesses from initial nexus diagnosis through voluntary disclosure and, when necessary, full audit defense.