Sales Tax Administrative Litigation Process for the State
Your business has survived a state sales tax audit. You have endured the grueling process of a state sales tax audit. You have given it one good shot with the auditor and protested and appealed the assessment within the allotted timeframe. After all that, the state is still holding strong and the state sales tax assessment has not been reduced to your liking. Like most areas of the law, if you cannot resolve a dispute with the state, litigation can be the great equalizer.
The administrative court or tax court process is somewhat confusing. Some states allow a taxpayer to challenge a tax assessment by going to a truly independent administrative court or tax court to get a disinterested review of the situation and ruling to resolve the dispute. However, in some states, the administrative court provides a suggested ruling that the state sales tax department can accept, modify, or reject. And, in some states, the administrative court process is held within the agency by a hearing officer of some type. Except for the truly independent court situation, the administrative court process can be and feel incredibly unfair.
That being said, litigating the case in state administrative court, tax court, or traditional judicial court can be incredibly beneficial in the business resolving its sales tax dispute. In most states, at this phase, the sales tax case is transitioned from the state taxing agency to its attorney’s office, usually the attorney general’s office. Much like the business, risks are evaluated between the agency and their lawyer. There are costs of litigation, risks of loss, and impact on other taxpayers to be considered. For these and a variety of other reasons, this leads to much more favorable and realistic settlement opportunities for your business’s sales tax case.
Administrative / Tax Court vs Judicial Court: Pros and Cons
Whether you go to the administrative court or judicial court to resolve your state sales tax dispute is a tough decision, but most of the time we recommend administrative or a tax court.
In most states and for most cases, the administrative court is the right answer for most businesses with a state tax dispute. The advantages of the administrative court are:
- It’s Quicker – While most judicial courts have a large docket stuffed with all kinds of cases from divorce, to foreclosures, to a business deal has gone awry, administrative courts generally only hear cases involving state agencies, so there tend to be much fewer cases that administrative law judges can get to and resolve more efficiently.
- It’s Cheaper – Due to the speed and efficiency cases move along, there tends to be less for sales tax lawyers or professionals to fight about, which reduces cost. Further, in administrative court, unlike judicial court, you do not need a state sales tax lawyer. Rather you can use a state sales tax professional, which tends to be cheaper by the hour. In addition, most professionals that regularly handle state sales tax cases tend to be more efficient because they are simply used to handling sales tax cases.
- Judge Expertise – Most administrative law judges regularly hear cases involving state agencies, including state tax cases. In most situations, having a judge that is familiar with sales tax issues and actually interested in your business’s gripe with the state taxing agency is usually to the benefit of the business. However, if you have a not so strong sales tax case, maybe you would want someone who doesn’t understand the state sales tax. In most cases, though, usually a disinterested judge, especially in traditional judicial court, is more inclined just to agree with the state and move on.
- Pay to Play – In some jurisdictions the pay-to-play factor is somewhat irrelevant because some states require that you pay or post bond for the assessment to continue your fight. However, in most states, you do not need to pay the assessment, or you can only pay part of the assessment, in order to fight it in administrative court. Conversely, going to judicial court usually means you have to pay the assessment and then fight to get it back. That can make judicial court not only a practical impossibility but getting the state to refund anything can be a very difficult settlement position.
Administrative Court Procedure
Most states’ administrative courts have adopted all or a majority of the administrative procedures act or APA. In short, this means that there are certain minimum standards the states must abide by in attempting to get your business to pay a state tax assessment. The minimum standards require that fair notice be given to the business and a clear statement with deadlines be provided if the business wants to contest the state sales tax assessment. It also gives your business a right to a hearing. The APA also dictates the rules of witnesses, evidence, hearing procedure, and the procedure for order or other disposition of the case.
When you start hearing words like evidence and witnesses, you are probably thinking that this sounds a lot like the real court. In most states, and even though the rules are laxer, administrative/ tax court is incredibly similar to a real grown-up court. Making sure you are capable of getting evidence into the record, examining and cross-examining witnesses can be critical to your case. Although a licensed sales tax law is not always necessary you really need an experienced sales tax professional representing your business at this stage. Going at it alone can seriously jeopardize your ability to get your business’s assessment reduced or thrown out.
Most states allow for and some require a pre-hearing conference, either in person or by telephone or videoconference. The hearing officer or the ALJ may dictate a pre-hearing conference in an attempt to get the case resolved without a full hearing. The purpose of the conference is to settle the case or send it to some for mediation or dispute resolution. It is basically a last-ditch effort to settle the case and save everyone time, energy, and money.
Just like typical court or the court dramas you’ve seen on TV, sales tax cases actually have witnesses. Usually, the taxpayer will call someone familiar with the business to explain their side of the story. The state taxing agency’s lawyer will have the opportunity to question and/or cross-examine them as well. Similarly, the taxing authority will call witnesses to explain how the audit was done and documentation relied upon to assess sales tax.
Not only is questioning and cross-examining witnesses an art, but there is a lot of preparing for a sales tax case even for the experienced sales tax lawyer. It is important to remember the role of a witness is to provide factual testimony to support the law at issue in the case. Carefully preparing and crafting answers and responses to questions is essential in a state sales tax dispute. It would be a colossal misstep for a business owner or even another professional to handle a sales tax case in litigation with significant experience.
Similar to the witnesses, state sales tax cases actually have evidence. While it is true sales tax cases lack interesting evidence like the murder weapon, DNA, or motive, organizing and submitting the proper evidence is critical to winning your state sales tax case.
Lack of credible evidence is one of the most common ways we see non-sales tax attorneys and run of the mill lawyers and tax attorneys fumble a sales tax dispute. Understanding the audit and having a sales tax professional will be crucial in preparing your evidence such that you combat the state sales tax auditor’s pesky estimates, disallowed exempt sales, and other issues that came up during your state sales tax audits. Equally important is understanding how to get your witnesses to testify and make your otherwise useless paperwork incredibly useful evidence to substantiate your case.
In most states, the hearing operates much like a trial. There is a prehearing phase in which motions are filed and responded to and prehearing filings must be submitted to the court. Generally, each party must pre-submit its factual and legal arguments, its intended witnesses, and submit copies of its proposed evidence to the administrative or tax court.
Most hearings are technically public but other than the parties to the case it is incredibly rare that anyone shows up. A court reporter is typically present for the hearings and a transcript records the proceedings. It is imperative to develop the record in the event an appeal is to be had.
Each side presents testimony and evidence to the hearing officer or the ALJ. Like the typical court, each party has the opportunity to cross-examine the witnesses as well. Unlike the judicial court, hearsay evidence is often admissible, so long as it supports other evidence or testimony. Similar to a court, ex parte communication is not allowed, which can be a misstep for the unrepresented business.
Some keys to remember if you are going at the hearing yourself or you are a professional unfamiliar with the peculiar world of state sales tax:
- Prepare, Prepare, Prepare: The most important aspect to your state sales tax case is preparedness and organization. A tactful experienced sales tax lawyer or other professional knows their case inside and out. Nothing presents better than a prepared business or representative who knows their facts, knows where to quickly and efficiently find evidence, and can persuasively present their case. Conversely, a disorganized sales tax attorney, business, or other sales tax consultant can be incredibly disruptive to the judge or hearing officer, which can lose the case. As our memories and passion often fade over time, it is usually beneficial to the business to interview witnesses, review and analyze the agency’s files, and begin to organize the critical evidence for your case.
- Know Your Strengths, Master Your Weaknesses: Knowing your strengths and weaknesses can really be a subset of preparation. However, in many cases over the years, we see the agency and businesses alike, only interested in attacking the other side. The key to a good case is highlighting your strengths, pointing out the opponent’s weaknesses, and developing a reasonable explanation for your own weaknesses, which are often also your opponent’s strengths.
- Practice Makes Perfect: Many businesses and often the state agencies are busy and believe they do not have time to discuss their case with their own witnesses. Along the lines of organization, it is helpful for a nervous witness or inexperienced sales tax lawyer or other representatives to discuss potential questions with their witnesses. While you cannot encourage false testimony, nothing is wrong with prepping a witness with potential questions.
- Present Critical Evidence and Witnesses: During the preparation, you or your sales tax professional should know the critical documentation evidence to make your case. In addition, properly deploying the key witnesses to explain that key documentation.
- Do Not Be Afraid to Summarize: ALJ’s and hearing officers are humans, even though they may not feel like it all the time. Making your presentation as to why you do not owe the assessed amount of state sales tax may not be the most riveting topic of all time. There are times when excruciating detail is important, but in most situations, the hearing officer or ALJ will appreciate the lawyer, professional, or the business summarizing and shortening some of the detailed documentation evidence.
- Try to Avoid Leading Questions: While it is often tempting, it is improper to lead your witnesses with questions. Instead ask who, what, where, why, and how and let the witness tell the story, not you.
On the date of the hearing, the agency will usually tell you, your sales tax lawyer, or sales professional when and where the hearing will take place. In many states, you can do the hearing live in-person with the administrative judge. In other states, you may have the option to do the hearing telephonically or remotely. During the hearing, several important decisions must take place on the fly as to carefully crafted opening statements, the allowance or objection to witnesses and evidence, and the key questions or testimony to derive from your witnesses or testimony. In short, you need a sales tax professional who is experienced in sales tax litigation on your side.
At the conclusion of the hearing, the real work begins. Generally, the hearing officer or ALJ will instruct each party as to how to submit their proposed order or disposition within a prescribed timeframe. The proposed order is your time to persuade the decider in writing.
Similar to the other phases of the hearing, drafting a clear proposed order is one of the key roles of the sales tax professional. The best orders should be clear, concise, and to the point. The purpose is to focus the ALJ on the facts that support your case and apply them to the relevant law to get the ALJ to rule on your side. There is no better feeling than when the ALJ uses chunks of your artwork in his or her final disposition.
The procedure of the final disposition of the administrative court or tax court varies from state to state. However, following the conclusion, the non-prevailing side can appeal the case. Further, there may circumstances in which the prevailing party can recoup some of its fees and costs from the other side.
As explained above, most states do not require a state-licensed tax attorney to represent a business before the agency. Having a power of attorney with a qualified representative is often adequate to represent your business with a sales tax issue in the state. More important than the letters after their name is whether your sales tax professional is well versed and has extensive experience with state sales tax issues, is what really matters. While our team is not licensed attorneys in the state, our team has former auditors, accountants, CPA’s and experienced sales tax attorneys that have decades of experience fighting state sales tax issues.
In the end, you get decades of sales tax know-how at a fraction of the price. Instead of traditional hourly rates charged by traditional tax lawyers, we offer fixed-fee pricing and you only pay for what you need. Unlike run of the mill tax lawyers, who often only have experience with federal tax issues, our team’s expertise is with sales tax issues and state sales tax laws.
At Sales Tax Helper we help those in need of sales tax audits, protests, and administrative litigation. More importantly, we provide services equivalent to tax attorneys at the price of a sales tax consultant. Simply put, this is what we do, and we will work hard to reach a reasonable resolution for your business’s sales tax liabilities. We welcome the opportunity to handle your sales tax issues and be part of your team!
Q:What triggers a 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.