Chapter eight

Review: Sales Tax Audit Checklists

The 4 areas to review in a pre-sales tax audit review. Items to review on a regular basis to be prepared for a sales tax audit. Checklist of items to keep in your permanent sales tax audit files.

Helpful Checklists

sales tax audit penalties

FAQ ► What 4 Areas to Review in Your Pre-Audit Assessment? (See Chapter 1 for more details)

  • Nexus
  • Fixed Assets 
  • Use Tax Accruals and Sales Tax Payable Account 
  • Exemption Certificates 

Exemption Certificates

FAQ ► Where is a Checklist For Preparing for an Audit of Our Sales Tax Exemption Certificates?

Here’s a handy checklist you can download created by Avalara to assist you in evaluating your readiness for an audit of your exemption certificates.

Ongoing State of Readiness for Sales Tax Audit

sales tax audit checklist

FAQ ► What are the Regular Items to Review as Part of Your Company’s Overall Tax System? (See Chapter 1 for more details)

  • Regularly review the minutes of the Board of Directors and executive committee meetings to identify and plan for significant plant expansions, purchases, contractions, or company reorganizations;
  • Periodically review of exempt and resale exemption certificates to ensure that they are complete and in proper form. 
  • Periodically review company depreciation schedules for any “big-ticket” items will ensure that sales/use tax was either paid or use tax accrued on the purchase (assuming it was taxable). 
  • Document tax positions taken on gray or ambiguous areas of the law while memories are fresh. The memos and supporting statutes, regulations, and cases should be stored in a permanent file.
 

Keep These in Your Permanent Tax Files

FAQ ► What Items You Should Keep In Your Permanent Files (See Chapter 1 for more details)

  • Legal entity being audited
  • Audit period
  • The state that is being audited
  • Auditor name and contact information
  • Initial audit assessment
  • Final audit assessment
  • Notes discussing the largest items identified under audit and other areas in which improvement is needed to reduce future tax liabilities

Never Start a Sales Tax Audit Until You Know...

FAQ ► Things You Should Know Before You Ever Commit to an Audit Start Date (See Chapter 1 for more details)

  • The scope of the audit (one state or many, etc.)
  • Whether you have the personnel available to obtain and provide the information requested
  • The availability of suitable office space
  • The schedule of other ongoing audits
  • Audit location (where the auditor wants to perform the on-site review of documents)
  • Whether a consultant will be used and their availability
  • Applicable statute of limitations
  • Whether the auditor is traveling (could be helpful to know how many days they’ve allocated for their visit)
  • Whether the audit raises sensitive exposure concerns (there were large acquisitions during audit period, nexus issues, exemption certificate issues, etc.)
  • What the sampling procedures will be
  • Who your Audit Coordinator will be

Statute of Limitations for Sales Tax Audits

sales tax audit process

FAQ ► Chart: How Far Back Can States Go When They Audit You For Sales Tax? (or, What is the Statute of Limitations for Sales Tax Audits?)  

 

A state’s sales and use tax statute of limitations applies as a limit to how far back a state can go when they audit you — that is assuming your company has been registered and filing sales tax returns in that state. Some states have different limitations for audit assessments than they do for refunds. Remember this: If a taxpayer fails to file a return, the statute of limitations in most states never runs. Check out this chart from CCH that shows all the states and how far they can go back. 

FAQ ► How far back can you go back in seeking a refund of sales taxes? (Or, what is the statute of limitations for sales tax refunds?)

Check out this chart from CCH that shows all the states and how far you can go back with a refund claim. Keep in mind that Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose sales and use tax, so they are not listed in this chart.

A state’s sales and use tax statute of limitations applies as a limit to how far back a state can go when they audit you — that is assuming your company has been registered and filing sales tax returns in that state. Some states have different limitations for audit assessments than they do for refunds.

 The steps for claiming a sales tax refund or credit vary greatly by state, but the most common procedures include: 
 
  • Adjusting the sales reported or tax due (or taking a credit) on a following return
  • Amending the original return(s)
  • Filing a separate refund claim either by letter or specific form 
 
The easiest and quickest way to get a “refund” of taxes overpaid is by taking a credit on the return you’ll be filing next month. But, be careful here, just because a state allows this method as one mechanism does not mean that it’s allowed in all situations. For example, do not assume you can take a credit on next month’s tax return for tax you paid to a vendor in error. If a state allows you to do this, it’s usually only in the case where you paid tax in error on inventory for resale. 

 

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