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.
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