A sales tax audit can be your worst nightmare as a business owner or operator. Even in the best case scenario, you’ll lose incredible amounts of productivity cooperating with state authorities who have an unbelievably frustrating eye for detail. In the worst case scenario, you’ll end up with a huge bill you weren’t expecting. Here are some things that can trigger a sales tax audit.
Your Invoices to Clients
Audits tend to beget audits. If one of your clients is audited, and the state found that you didn’t charge the client sales tax on a transaction (or worse, a series of transactions), you may end up getting audited. To protect against this, make sure you are charging sales tax under all appropriate circumstances.
Abundant Internet Sales
The law surrounding the taxation of sales occurring over the Internet is confusing and rapidly changing. However, there is one general truth: companies must collect sales tax on intrastate transactions. If you have a physical location in State A, you should charge a sales tax on all sales to people in State A (assuming what you’re selling is taxable). Businesses that make most of their sales out of state, however, sometimes neglect to charge sales tax on the minority of transactions that occur entirely within the state. State auditors know this, and can make it a basis to conduct a sales tax audit. Again, make sure you are charging sales tax under all appropriate circumstances.
Auditors know that competitors tend to have similar business models. They also know that some industries are more susceptible than others to tax deficiencies based on the complexity of the taxation scheme. If an auditor begins to see a pattern of sales tax violations among your competitors, he might conduct a sales tax audit on you next.
A Disgruntled Employee
Many employers are worried that a particularly bad firing might result in an employee blowing the whistle to state and federal agencies, including state tax agencies. It certainly does happen. The good news is that auditors don’t like to spend their time chasing violations that don’t exist. A disgruntled employee is going to need to show some credible evidence of sales tax violations in order to cause an audit.
Random Bad Luck
It’s impossible to completely guarantee that you won’t be made the subject of a sales tax audit. Every state agency has some mechanism for choosing its audit victims at random. If your name comes up, you’ll be getting audited, even if you took all the steps you possibly could to avoid it. The best defense is to be prepared to provide the documentation that proves you’ve followed the rules!
Small and medium sized businesses are forced to be thoughtful and frugal about staffing as they work to make a buck in this economy. So...not many of them are clamoring to staff a sales and use tax group to ensure they pay everything they possibly could to a State or Local Jurisdiction. Instead, they do what they can do, with whomever is available, to make decisions about sales tax collections and then get the monthly returns out the door. What goes unattended are things like understanding their nexus, determining the true taxability of products/services, automating their processes, managing exemption certificates, taking advantage of amnesty/Voluntary Disclosures (if needed), and gracefully navigating audits. The question is, if these things are tablestakes in managing sales tax, why aren't companies motivated to invest in them? The answer is simple - it's because of who's minding the sales tax shop.
You see, a small business that is growing finds out what their sales tax obligations are - they don't generally plan for them. The burden of handling the responsibilities they just found out then shifts to someone who wasn't hired for that unplanned responsibility. As the burden and responsibility grows, that person who inherited sales tax does what they have to do and what they know how to do - get the returns they've always filed out the door. So the person minding the shop is someone who knows very little about the discipline of sales tax. It's kind of like having a mail clerk eventually ending up with the responsibility for responding to investor questions. It all started with the mail, and he's good at opening it...right?
What invariably ends up happening at a growing small business is that sales tax gets slightly out of kilter. An assessment rocks your world, an auditor wears you out, notices get your goat, or an oversight results in some financial (over even criminal) liability. It's the common cycle, because your accounting clerk doesn't know how to side step sales tax landmines any better than the mail clerk knows how to keep investors happy.
The real issue is that most growing businesses don't even have an understanding of what kind of liability or trouble they are creating by ignoring sales tax. It's a silent killer, and it shows up infrequently enough that you feel safe...until it does show up. The other impediment is that even a wildly successful small business can't afford to hire someone with sales tax "insider knowledge". There's just not enough for them to do to justify their salary. You feel confident in letting the mail clerk mind the shop. Until the auditor shows up. Or the assessment rolls in. Or the shop gets closed.
So think about these as alternatives. Buy just enough time every month from a sales tax professional to keep you compliant and in the know. If he's worth his salt, he's quick, knows where the landmines are, and can save you more than he costs. Or hire a sales tax person who can also be taught to handle other tasks competently. Think of it this way - it's like having an Investor Relations manager who really likes to open and distribute mail, in contrast with a mail clerk who is good at sorting mail, but dreads communicating with investors.
You'll get a much better outcome if you're intentional about getting the sales tax help you need! One call to an expert like TaxConnex could get the right person minding the shop.