Notices…A word that has such an ugly connotation to those of us in the compliance industry. While notices at TaxConnex have never been an issue of concern, the fact that jurisdictions are changing the way they communicate could indicate your recent lull in notice activity is giving you a false sense of security.

My daughter and future son-in-law are both CPAs working for a local CPA firm. They work in audit, not tax, but we often talk ‘shop’ at family dinners. (Needless to say, my wife and other daughter do not enjoy our ‘CPA talk’ at dinner.)  

We’re often asked what triggers a sales tax audit.

Unfortunately, there’s no magic formula for avoiding a sales tax audit. Here are a few things we’ve seen over the years that sometimes precede a sales tax audit:

I frequently talk with companies who sell to end-user/consumers who have told me that they don’t have any sales and use tax risk because they pay sales tax to their vendors – while they failed to charge sales tax to their customers.  They are comforted by the fact that “the state got their tax revenue and therefore shouldn’t come knocking for more”.  When I tell them that they still have a sales or use tax liability, they are surprised.  When I tell them they may not get ANY credit for the tax they paid to their vendors, they get irate – “What do you mean I still owe the tax – that’s double taxation!”

Looking back on last week, I talked with several companies that were overwhelmed with how to address their sales tax compliance obligations. In each situation, the company was out of compliance in multiple states. The myriad of nexus issues, taxability issues, customer exemptions, registration requirements, how to get tax on their invoices, etc. had brought them to a spot where they knew they needed to do something … but they didn’t know where to begin.

In my last blog, I discussed the opportunity CPA firms have to use sales and use tax issues as a way to add value to their clients and further cement the relationships and related revenue stream. As promised, this blog provides the following action items for identifying sales and use tax risk with your client:

Throughout my career, I have worked in and with CPA firms of all sizes. For the most part, they all have similar business models that are heavily dependent on their client relationships. The CPA firms and the individual CPA’s within the firms need to continually prove their value in the relationship by exceeding client expectations, which guarantees the relationship and related revenue remain secure. One of the ways a CPA can exceed expectations is by offering solutions to unidentified client risks and problems.

I am frequently asked how a business is selected for a sales tax audit. I generally say it could be the result of an audit of one of the business’s clients where the auditor sees no sales tax on an invoice. Or it could be related to a particular industry that is being targeted. Or perhaps an unlucky winner of the “audit lottery”. Here’s a unique situation that I stumbled across when reviewing the taxability of telecommunications services in Illinois for a client.

My last blog discussed why the most costly sales and use tax compliance errors are timely filing of returns and payments, and knowing your requirements to file or pay electronically. There are three additional sales tax compliance factors that can cost you big as well --- changes in your filing frequency, new prepayment requirements, and timely response to notices. As your business changes, so can your sales and use tax compliance requirements.  Whether it is from growth, acquisition, adding a new product line or no longer selling a certain product line, these business changes can all lead to a change in your filing frequency and prepayment requirements.

Document, document, document!  The best way to manage risk associated with potential disruptions (turnover, personnel changing roles, or acquisitions) within your sales tax department is to maintain thorough documentation of your department’s compliance processes.

Customer service is often cited to differentiate one company from another. I’ve always struggled with how to relay the true value of customer service. I would consider it a “soft” differentiator in that it’s fairly objective and difficult to quantify. Delivery times would be a “hard” differentiator when expressed as a number of minutes/hours. “Our delivery time is 24 hours from the time you place an order”, is easily measured. How do you measure “customer service”? It’s best to break this down into some “hard” components that can actually be quantified.