Since the creation of economic nexus, state sales tax audits are more common than ever. And with six-figure liabilities – and businesses, careers and retirements on the line – the stakes have never been higher. Here’s our guide to help you survive it all.
You are under audit.
Four terrifying words that are now the norm in a post-Wayfair world. If you’ve received an audit notice, you understand the fear it brings. If you haven’t – you will, sooner or later. How you respond to this development will impact your career, your business and your employees.
But fighting an audit takes time, energy and money. And when the dust settles, you could still face a mountain of liability that you owe the state government. For organizations, this can signal the end. Especially if multiple states audit you at the same time – which can happen.
The good news is with the right preparation and response plan you can survive. So, whether you’re currently under audit or looking to prepare for the worst, here’s what you need to know.
(New to economic nexus? Here’s everything you need to know about economic nexus.)
What You Stand to Lose
A state sales tax audit is the real deal.
At the end of an audit, you could be left with tens to hundreds of thousands of dollars in liability that you owe to the state. This cuts into your profits and your income. And if you’re a sole proprietorship, it could even swallow your retirement.
We’ve heard firsthand stories of sole proprietors preparing to retire only to get an audit notice. Then the state finds them liable for eleven years of unpaid sales tax.
When states audit, they don’t just audit the last few years. They go back decades. In fact, it’s rare to see them look at less than three years.
Despite these high stakes, most companies have no clue what their liabilities are. They don’t spend the time or money to stay compliant and prepared. By failing to understand what they could lose, they unknowingly increase the risk that they will lose everything.
Why You’re Being Audited
There are a lot of reasons a state could choose to audit you. Sometimes you’re due for a regular audit, other times it’s just random bad luck. It could be your industry. An audit of one of your suppliers, competitors or customers might direct attention your way.
There are as many state sales tax laws as there are states. And just as states have their own nexus laws, they also have their own auditing procedures.
One constant: The number of audits has increased dramatically since the landmark Wayfair vs South Dakota court case.
Since Wayfair introduced economic nexus, states audit more frequently, going after businesses they think might have economic nexus and didn’t know it. If you’re under audit, you need to understand Wayfair.
How an Audit Works
When the state informs you of the audit, they’ll tell you what documents they need to see. They’ll also clarify the period the audit is reviewing in a statute of limitations. After the initial phone call, a state auditor will come to your office. You’ll give them the box of documents and the digital files and then the auditor goes through the information.
The audit could take a few days or several months. The timeline depends on company size and the matters under audit. Afterwards, the auditors will come back and give you an assessment.
It’s worth noting that the audit process is not all doom and gloom. There’s room for negotiations on liabilities and ways forward. With the right counsel and information on your side, you can make your sales tax audit as successful as possible.
What Auditors Look for
The goal of a sales tax auditor is to look through a business’s records for discrepancies in tax collection and payment. Auditors both look at and find errors in many areas – and they change state by state. Here are the most common:
- Missing exemption certificates
- Failure to tax shipping charges
- Lack of receipts to show taxing credit card transactions
- Errors taxing intercompany transactions
- Invoice discrepancies
- Failure to tax in areas you have nexus
Where to Get Help
State sales tax laws are complex. Trying to understand the tax laws of 50 states and how they impact your business is next to impossible. Plus, it’s hard to remain objective during the long and exhausting process that is a state audit.
Getting compliant with state sales tax requires informed counsel. Most businesses have a CPA to turn to, but CPAs often don’t practice sales tax. Because of this, many businesses work with sales tax experts for sales tax audit help.
Sales tax experts often start with a nexus review, a call where they work with you to determine where you have nexus and liability in each state. They’re also up to speed on constantly shifting areas, like nexus thresholds and sales tax amnesty.
Working with sales tax experts makes surviving a state audit easier because they can identify your liabilities before the audit ends. This gives you time to prepare for any large liabilities or payments the audit might create.
Think of it this way. If you had a potential $200k liability, would you want to know now or later?
Conclusion: What’s Next?
State sales tax audits are a challenging experience for businesses of any size. But with the right preparation and counsel, you can come out the other end.
If you’re under audit or if we’ve scared you into preparing for one, here’s what you should do:
- Contact your CPA
- Contact a sales tax specialist. Got audit problems? We can help. Set up a free consultation today.
- Don’t do nothing. It’s easier to stay compliant with sales tax than to get compliant later. Use this as an opportunity to prepare for when the next audit comes around. (And it will.)
- Do your homework. The first step towards compliance is understanding how it works. Here’s everything you need to know about economic nexus.