Managing Sales Tax Auditors
Playing Nice: What to Give the Sales Tax Auditor and When to Push Back
Above all, collecting and not remitting state sales tax is a crime. If you made the mistake of doing so there are ways to deal with it. Under no circumstances should you accidentally turn over documentation to the auditor that shows you committed a crime. We have handled hundreds of cases over the years in which the referring sales tax attorney has turned over, often accidentally, documentation that indicated state sales tax was collected but never paid on a sales tax return. Do not make that mistake!
In any event, you have already received that dreaded audit notice from the sales tax department. You have dealt with your pre-audit issues, such as checking the statute of limitations, not waiving your grace period allowed by law, organizing your documentation, and performing your pre-audit checks. You also likely discussed an audit plan with the auditor as to whether they will sample certain months or do a detailed audit.
NOTE: We HIGHLY recommend not signing the sampling agreement. Like so many state sales tax audit documents it is one-sided and only benefits the state, not you. Signing a sampling agreement often binds you to it and if you do not sign it, the auditor will likely sample the months anyway.
Most sales tax auditors will request a site visit or site tour. And, in most states, they are entitled to tour the business location. However, touring the site does not mean discussing the audit with the owners or employees of the company. It does not mean reviewing or perusing through your sales tax files. It means walking through the site to glean a snapshot of the operation and what your business does. It can be helpful in many circumstances, but not understanding the purpose of the issue by a sales tax amateur can lead to unintended and unexpected issues with your audit.
Your sales tax attorney or state sales tax pro can be worth their weight in gold for this step. A seasoned state sales tax professional or lawyer knows how to get the auditor in and out in under a half-hour and make sure they do not leave with any more information than they are entitled to. Allowing them to discuss the business with your employees, who may or may not understand the business operations themselves, or needlessly allowing access to irrelevant files will just create more harm than good and result in an overinflated sales tax assessment. Like most state sales and use tax mistakes, the auditing state will appreciate your donation.
And We’re Off: Sales Tax Audit Begins
Following the site tour, the auditor is likely ready to begin his or her audit work, or document review. While some multi-state sales tax lawyers and consultants allow the auditors to have as long as they need and conveniently setup up the auditors at the company’s location, we do not. It is unavoidable in certain situations, but by in large, the auditor should be provided the documentation electronically to do at their office or they can do the audit in our office.
Having the auditor on-site at the business for an open-ended timeframe has caused nightmares for businesses time and time again. They can ask uniformed employees questions. They can peruse areas of the business that are irrelevant to the audit. Given enough time, the auditor will come up with issues to invent a hefty sales tax assessment for your business. We have even caught auditors trying to look through filing cabinets and boxes that we specifically told them they were not allowed to review.
It is not that we are uncooperative with the state sales tax auditor. In fact, we provide the auditor with organized documentation to allow them to evaluate that gross sales have been reported, exempt sales are properly documented, the tax was paid on a fixed asset and out of state purchases, and the tax collected was remitted to the taxing state If there are issues, whether they are documentation or legal in nature, we present them in the best possible light for the auditor to evaluate. In short, we strive to align with the auditor’s role, to accurately review the business for sales tax as efficiently as possible.
Disagree with the Sales and Use Tax Auditor or Move On
Inevitably, issues with the sales tax auditor may arise during your audit. Many state sales tax lawyers believe arguing is in their nature and they must fight every issue to death. The reality, however, is that if the sales tax issue is documentation in nature, such as whether the company has proper exemption documentation, it is worth presenting to the auditor. Legal issues, such as to whether a particular type of transaction is taxable, are worth stating your position, but just once with the auditor.
Auditors are told by the decision-makers that if it’s legally grey to write it up and let the taxpayer deal with it on protest. It is very confusing as to why so many state sales tax attorneys get into heated debates with auditors on legal issues that the auditors have no authority to make a decision on. It has been proven over decades of experience in our practice to put forth a respectful and assertive argument with the auditor and then move on.
To Sign or Not to Sign Sales Audit Agreements
Would you an agreement to buy a house without understanding the implications of doing so? Would you sign an agreement at a car dealership without having any clue what you’re signing? Shockingly, many of the smartest business owners on the planet sign sales tax audit agreements without having the slightest idea as to what they are doing. Just like buying a car or a house, it could cost you tens or hundreds of thousands of dollars.
Sampling agreements and the like were touched on above but there are numerous other documentation decisions that must be made during a state sales tax audit. Frankly, unless you are well versed in-state sales and use tax, you should not be making many of these decisions alone. Whether to agree to sample terms, the audit outcome, the statute of limitations waivers and extensions, computer-assisted audits, and many other agreements the state puts in front of you must be evaluated as the audit progresses. In most cases, they are only advantageous for the state and the auditor and almost never to your advantage. In most cases, the sales and use tax auditor is going to proceed the same way whether you sign or not, so we generally recommend, when in doubt do not sign. Surprisingly, even though the all-mighty state might feel like they are forcing you to do something you always have the right to say no.
For most of these decisions, you do not need a licensed sales tax lawyer. You do need a sales tax professional who is well versed in-state sales and use tax audits and knows how to deal with auditors. It is an art more than a science to know when to say no when to sign or say no when to provide the auditor documentation if you should provide documentation, where to have the auditor, and what is reasonable for the amount of time for the auditor to complete the audit. While most federal tax attorneys have experience in federal tax, most do not have experience handling state sales tax matters. At Sales Tax Helper, our sales tax consulting team has decades of experience working with sales tax auditors. Not hiring someone who knows what they are doing can cost your business tens or even hundreds of thousands of dollars.
Q:What triggers a sales tax audit?
A:You inadvertently waived a red flag or your company landed in the small percentage selected for a random sales tax audit. These red flags include: Cash-based businesses, prior audits that resulted in owed sales tax, your sales reported to the state didn’t match what you reported to the IRS, a high volume of exempt sales, filing a refund claim, or a high number of credits. There’s also a possibility that your business happens to be in an industry that your state suspects rampant under-reporting. Often times, they will target industries effected by complex sales tax laws.
Q:How do I prepare for a sales tax audit?
A:1. RESPOND to the notice; 2. Get organized; 3. Identify/hire your audit manager; 4. Notify your auditor of who they will be corresponding with; 5. Compare your sales tax returns against the federal tax return; 6. Test at least 1 month of exempt sales; 7. Reconcile your sales tax payable account versus your sales tax payments; 8. Review your fixed assets purchased — did you pay sales tax on them?; 9. Review your purchases on your key expense accounts to ensure tax was paid on your purchases.
Q:How long do sales tax audits last?
A:Audit duration can vary dramatically from state to state and from business to business. Waiver issues aside, an audit generally takes 3-7 months to complete. Surprisingly, some audits can drag on for a few years. Time factors usually swing on the size of the company, the ability to produce reliable and organized documentation, and the level of sophistication of the business.
Q:Can I do this myself or should I hire a sales tax lawyer or a sales tax consultant?
A:We all enjoy the occasional DIY project, especially when it saves us money. Before opting to go that route, consider the risk vs. rewards involved. Avalara recently conducted a study and found that the average sales tax audit costs around $115,000. When facing a sales tax audit, it is beneficial to have someone with knowledge of the financial implications on your side. That is where sales tax professionals, such as those at Sales Tax Helper LLC, can save you a lot of heartache and money by avoiding a few missteps.
Q:What accounting software and services do you work with?
A:TaxJar, Vertex O Series, Avalara, Vertex Cloud, Quickbooks, Proconnect Tax Online, Canopy, ONESOURCE, Sovo Intelligent Compliance Cloud, Intuit Lacerte, CCH SureTax, SS&C Advent Axys, Vertex Payroll Tax Q Series, Bloomberg Tax Advantage, VATBox, CSC Corptax Compliant, Oracle Tax Reporting Cloud, TaxCloud, Fast Enterprises, GenTax, Fast Enterprises FastUI, SAP Tax Compliance, Taxify, and ESKORT Compliance Solution.