Sales Tax Fundamentals
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What You Need to Know When Your Business Is Audited
byMarch 9, 2022
States use revenue from sales tax to pay for the things we take for granted: roads, fire departments and schools. But when a state feels like a company may be generating taxable revenue that’s not being accounted for, an audit isn’t far around the corner.
There are a number of reasons why companies are singled out for audits, which can include raising a new funding round or having revenues significantly different from the industry standards auditors use as guidelines. Some retailers have been audited for business milestones that may not even appear to be red flags, like announcing via press release about achieving significant growth. When an audit happens, what exactly are auditors looking for? And what steps can financial leaders take once their company is audited to ensure everything goes smoothly?
Audits measure tax assessments in three major areas, according to expert Lauren Stinson, CMI, the National Leader of Sales and Use Tax at Cherry Bekaert LLP (and a trusted TaxJar Partner):
The state is looking to verify that for every sale your company is making into their state, there is tax collected at the appropriate rate, or that there are exemption certificates on hand to document that the transaction was exempt from tax. For a more detailed look at exemption certificates, this article can provide background. Companies that utilize the TaxJar API or have integrated TaxJar into platforms like WooCommerce and NetSuite have the ability to upload and store the certificates.
- Purchases of fixed assets
A state’s taxing authority also typically audits the purchase of fixed assets to make sure that tax was paid. Keep in mind that just because you are a remote seller that made sales in a given state, that doesn’t necessarily mean you have made purchases in that state – this may only apply to the state where your company is physically based.
- Other business expenses
The auditor will also look to ensure that taxes were paid on purchases of business expenses. Documenting sales tax you paid on expenses might not feel important on the surface, but because resale certificates can be used to purchase raw materials tax-free in some states, it’s important to keep accurate records of any purchases of expenses.
How a financial leader can be proactive when it comes to audits
There are also a number of things Stinson says that financial leaders can do once their company has been audited:
- Make sure that all tax returns have been filed
If you use a sales tax compliance platform like TaxJar, it’s easy to stay organized and informed using our reporting dashboard, where our system compiles real-time transactional data from all your linked accounts and CSV imports into individual state tax sales reports. While you can use the reports to manually file on your own, when you enroll in AutoFile – one of TaxJar’s standout features – these reports will be automatically used to populate filing and remittance. We also provide reporting on a daily basis, and at the end of each filing period, so you’ll have access to the reports on the first of the following month.
- Provide the auditor all the documentation – provided it’s reasonable
They usually have a long laundry list of requests. Be forthcoming with the information that’s requested. When you get into the granular aspects of the type of audit that’s being conducted (it could be a sample audit or a detailed audit), look at how they’re going to do the audit. Be sure that the auditor has selected an appropriate time frame that’s representative of the overall business – if you’re a seasonal business, make sure the audit is looking at your busy season. And if there is a request for materials that seems out of the bounds of a reasonable audit, some companies push back on those requests.
- Make sure there’s a proper waiver in place
If you don’t think you’ll be able to meet the deadlines the auditors provide, they’re usually amenable to giving your company time to do a fair audit and extending it. That may come with an auditor’s request to sign a waiver of the statute of limitations. For example, if a state has a three year statute in place and no waiver is given for the statute, auditors would be unable to make assessments for any period prior to three years before the company was notified of the audit.
It can be a time-consuming process for any company to collect exemption certificates from customers or track down missing invoices. These technical aspects of the audit are important to be intentionally considered – it sets the table for an audit to be carried out as efficiently as possible.
- Pay attention to deadlines
Deadlines can creep up on even the most diligent finance team. Meeting deadlines is especially important in an appeal process, as if a deadline is missed, it may result in the loss of appeal rights.
- Keep all documentation that’s been sent to the auditor
Because audits can last anywhere from a few months to multiple years, there can be turnover on both your finance team and with auditors from the state’s taxing authority. It’s critical to keep records of anything sent to the auditor – this eases the burden of transition and gives both parties clear documentation of any negotiations that have been agreed to should there be future audits.
Why companies may consider hiring outside help for an audit
Not every accounting professional has deep knowledge of State and Local Tax (SALT) – that’s why it may be worth it to contract the services of an expert in that specific area of tax law. Stinson says that if a company’s financial team doesn’t have experience handling audits, it may not be the most efficient use of your team’s time.
For example, an outside firm knows the type of documentation that’s reasonable for an auditor to ask for, and how to manage a hearing (whether it’s informal or formal) in the case of any disagreements between the state and your company. Larger companies can be mired in audits for years, and even mid-market companies are typically looking at audits that last six months, with plenty of back and forth between a company (or a company’s representative) and the auditor. An experienced outside firm can manage this process and work towards the best possible outcome for your company.