What Triggers a Sales and Use Tax Audit?

Sales and use tax audits are on the rise. The chances of being targeted are high, but there are ways to minimize the risk.

Tax leaders and finance chiefs alike are pondering the implications of the Supreme Court’s June 2018 South Dakota v. Wayfair decision, which allows states to require remote sellers to collect sales tax on out-of-state transactions. The new legislation adds more uncertainty to a highly complex and variable tax environment subject to increasingly aggressive auditing by state and local jurisdictions.

We’ve described some best practices that can help your company steer clear of an audit in a Vertex eBook What CFOs Need to Know About Weathering a Sales and Use Tax Audit (see my previous post). Thanks to Vertex expertise in sales and use tax audits, the eBook also details actions, situations and conditions that you’ll want to avoid, to the extent possible, because they can spark a probe. These include:

1. A significant percentage of exempt sales: This can trigger audits because of misinterpretation of the law, errors in taking exemptions or outright non-compliance.
2. Nexus but no registration: If you’re not registered for sales tax but you pay another kind of tax in the same state, you increase your chances of an audit.
3. Late filings: Consistently filing your returns after the due date or remitting the tax payment in a non-timely manner can be red flags.
4. Incorrect math: Frequent math errors can draw enquiry; these are often the result of a large increase in sales.
5. Current vendor audit: If a seller is being audited and they haven’t charged you the correct sales or use tax, the auditors may turn their attention your way.

While some triggers may be unavoidable – and some states select companies for audit at random – the eBook describes ways to manage the risks, noting that “automation, along with rigorous processes and frequent internal review, can make the audit a little less painful.”

Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.