How Does My Business Get Flagged for an Audit?

Sales tax audit changes have occurred over the last several years, post-Wayfair. Prior to Wayfair, a significant component of sales tax audits was focused on use tax. Specifically, tax due on purchases that were not charged since the vendor did not have nexus in the state of the sale.

Today, more and more companies have an obligation to charge sales tax, and use tax is less of an issue. This change has required many taxing authorities to pivot slightly in their approach to audits. While exemption certificates have always been a hot topic with state auditors, having the appropriate validated certificates has become more important. Additionally, as a result of the economic nexus standards, we’ve seen a new wave of nexus questionnaires landing on companies’ desks – sometimes leading to audits.

Sales tax is a significant revenue source for a jurisdiction. In fact, according Tax Policy Center, it can be the leading source for many departments, constituting 25%-35% of a state’s revenue. Wayfair lowered the thresholds for state and local jurisdictions to assert nexus, and more businesses have started to collect. But how do companies get flagged for an audit? There may be more ways than you thought.

Jurisdictions can discover your company’s non-compliance through an audit of your customer. Audits tend to beget audits. A customer undergoing its own sales tax audit might produce one of your invoices, resulting in the auditor questioning why you are not charging sales tax and potentially leading to an inquiry or nexus questionnaire being sent to your company. An audit of one of your suppliers could turn up one of your exemption certificates for something the auditor may think is taxable - resulting in a flag for an audit of your company. 

Auditors also know that competitors tend to have similar business models and that some industries are more susceptible than others to tax deficiencies based on the complexity of the taxation scheme. Audits of similar companies in your industry may also lead state tax authorities to run comparison data on you and your competitors, such as your percentage of taxable sales; even being off just a little bit could lead to you being audited. 

So, what happens if you do get caught? What can you expect? Slaps on the wrist? 

No - assessments stemming from audits include penalties of 25% or more and above-market interest as a matter of course, and they can also result in liens, use of collection agencies or, in extreme cases, referrals for criminal action.

To learn more, download our latest eBook – How to Prepare Your Business for a Potential Audit. 

TaxConnex can help you prepare for assist you in your sales tax audits and ensure you’re set in an already compliance sales tax process before the audit notice arrives. Contact us to learn about the latest sales tax audit changes and what they mean to you and your company.