Sales Tax Statute of Limitations
The State May Be SOL: Statute of Limitations Issues
Commonly, we get the question, how far can the sales tax auditor go back? A state sales tax lawyer or professional will tell you that it depends on that state’s statute of limitations. Generally, the triggering event to begin the lookback period clock is the later of the filing of the return, when payment is made, or when the return is filed. For most states, this means that if your business has never filed a return, there is an infinite lookback period. If you have sales tax nexus with a state and you have been in business for more than 3 or 4 years, you should strongly consider a voluntary disclosure to limit the lookback.
The State SOL
When you hear SOL, I am sure you are thinking like a sales tax pro, and the statute of limitations is the first thing to jump into your mind. As explained above, a state’s sales tax laws dictate how far an audit can go back to review a company’s sales tax records. While most states have a 3 or 4 year lookback period, most states have piggybacked federal law and can go back even further if there is substantial underreporting. In other words when you get that initial “you’ve been selected for audit” letter from the state, make sure they are only going back the amount allowed by law. For a complete list of the various states’ statute of limitations, please click here for CCH’s Multistate Sales Tax Chart.
Hello Freeze: Pausing the Statute of Limitations
Tolling is just a fancy word for freezing or pausing the SOL. In many states, but not all, the SOL is paused, or tolled, for a period to allow the auditor to complete their audit. For that reason, many states’ audit notices are for a 3 year lookback period from the date the audit notice is received, but when the auditor begins the audit, they have a year to complete it. If they do not complete it, the SOL is un-tolled or begins to tick again and periods, or sometimes the entire audit period is cut off.
A relatively recent case from Florida highlighted how important and powerful the SOL can be when used to a taxpayer’s advantage. In Verizon, the taxpayer was issued an audit notice (DR-840) in January 2007 from the FL DOR that it would be audited for the last three years, or January 2004 through December 2006. Therefore, under normal conditions, the Florida Department had until January 2008 (January 2004 + 3 years = January 2007 plus 1 year of statute tolling, or pausing, to do the audit = January 2008) to assess tax for the period of January 2004. Through a series statute of limitations extensions, Verizon and the Florida Department of Revenue agreed to extend the deadline until March 2011 for the Department to issue an assessment. The Department issued a notice of “proposed” assessment in February 2011, which would not become final for 60 days or April 2011. If the proposed assessment is an assessment, then the Florida Department of Revenue complied with the law. If, however, a proposed assessment is not an assessment, then the entire audit, which totaled $3,169,168.74 plus interest, would be time-barred by the statute of limitations.
Being that the assessment was not issued until after the expiration of the extension, the Court determined that the Department of Revenue could only go back 3 years from the date in which the assessment became final. In this situation, that meant the entire assessment, the full $3.17 Million of tax due was void. The Verizon case is an example of how powerful understanding the statute of limitations can be.
Statute of Limitations Extensions
The Verizon case is also a logical Segway to SOL extensions or waivers. As you have learned, an audit can typically go back 3 or 4 years and the state generally has a year to complete the audit. Due to the complexity of the audit, auditor procrastination, lack of taxpayer cooperation, and several other reasons, the agency will often approach the taxpayer and request the statute of limitations be extended to complete the audit.
Why would a business want to extend the SOL for the sales tax auditor? There can be several reasons. First, if you, your sales tax lawyer, or sales tax pro elect to not extend the SOL, the auditor will generally just throw as much against the wall by estimating the amount of tax due. Additionally, working with the auditor may help improve results by showing a cooperative demeanor. Overall, your sales tax audit manager should review the entire situation to determine whether signing the waiver or extension is the right move for your business.
It is important to have a sales tax professional on your side. In most cases, you do not need a sales tax lawyer, but having someone with extensive sales tax experience on your side. Our sales tax pros at Sales Tax Helper can help you evaluate whether the state is SOL, by blowing their statute of limitations. We can help by evaluating whether you should or should not sign the statute of limitations extension or waiver. Most importantly we have the experience and expertise to make sure the auditor calculates the correct amount of tax due and you pay no more than the amount your business really owes and hopefully less. We strive to match your business’s needs with our team to make sure you get the sales tax audit, protest, appeal, or litigation your business needs when fighting through a sales tax audit.
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.