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!