Letters from the Department Of Revenue are never good news – met with shaking hands and a cold sweat. What could they want? Yes, granted, they could be sending you some unexpected refund, but that is unlikely, particularly if you’re a business owner. What is more likely is you’ve done something wrong, or they’re trying to get more money out of you. If you live in a state that has sales tax, a sales tax audit could be one of those occasions where the DOR may come knocking.
What Is A Sales Tax Audit And What Causes It?
A sales tax audit is an examination of a company’s financial records by a government tax agency, to make sure a business is paying the correct amount of sales tax.
Sales tax audits may be ordered for a number of reasons, from blind chance to bankruptcy or foreclosure.
Some of the most common causes of sales tax audits are:
Discrepancies Between State And Federal Tax Returns :
This is probably the single most common cause of sales tax audits. A common mistake is that many companies don’t reconcile the monthly and yearly sales and use tax returns with the income tax returns. They forget to include the tax exempt sales, on their monthly statements, which results in the state sales tax return will be significantly lower than the federal, which will set off red flags and trigger a sales tax audit.
Too Many Tax Exempt Sales :
State tax agencies have a list of acceptable ranges of exempt sales for various industries. If a company goes too much above this range, it can trigger an audit. There are many legitimate reasons for having a high rate of tax exempt sales, particularly in this day and age, some of which include shipping a high volume out of the state; shipping a high volume of the same product; and having a high rate of tax exempt customers. It can be caused by a spike in tax exempt sales, as well. Even if you have a legitimate reason for a high amount of tax exempt sales, it can still trigger an audit. If you are an online retailer, make sure you keep the proper documentation and have it handy.
3rd Party Reporting Discrepancies :
If you work with 3rd party retailers, such as Amazon, eBay, or Overstock, the government may be keeping tabs on your sales data. Local tax agencies have figured out ways to quickly and easily access a company’s online data, and cross-check it against their state tax returns. In the case of high price ticket items, many states have local agencies that check packages crossing state lines. If the revenue service hears of an expensive item crossing state lines, tax free, the seller may anticipate an audit.
Susceptible Industries :
Certain industries are notorious for under reporting, which makes the prime candidates for a sales tax audit. Other industries, that have connection to 3rd party reporting agencies, such as bars, restaurants, liquor stores, and used car dealers with ties to the DMV. If you belong to any of these industries, make triple sure to do everything right, and keep all your paperwork in order.
“Prior Productive” :
Revenue agencies keep sales and use tax records from multiple years, to compare and contrast. Companies that have reported over $10,000 in adjustments in previous years are prime candidates for auditing.
Nexus, also known as sufficient physical presence, is the determining factor in whether or not a company is expected to pay sales tax in a state. Nexus is created when a company maintains a temporary or permanent presence of people or property, such as inventory, warehouses, or offices. Nexus can be created while visiting out of state for trade shows, business travel, or consigned inventory. Nexus is notoriously tricky, with every state having its own rules and definitions. Nexus can be instated after as little as one day, and can vary depending on activity as well, so if you’re traveling or doing business out of state, make sure to check the rules before you go!
Late Filing :
The last, and other most common, cause of a sales tax audit is filing late. Taxpayers that continually file late are almost assured to be audited, eventually. It doesn’t mean you’re a bad person, or the revenue department is punishing you, it’s just that they’re likely to be looking more closely at the late files.