July 1, 2016
If your company has not had the unpleasurable experience of a state sales tax audit within the last two or three years, it may be time to batten down the hatches!
Across the nation, state sales tax audits have increased significantly over the last few years and that trend is likely to accelerate. The reason is simple – sales tax audits are proven revenue generators for the cash-starved states.
For years, many small businesses have grown lackadaisical toward inquiring about and obtaining exemption certificates from customers. Filing and paying use taxes on out-of-state purchases is also a practice that many companies widely neglect.
Since states use the same cost-benefit type ratio that companies use to help determine where they focus their resources, there’s little wonder that audits are on a substantial rise.
Most states have historically concentrated their auditing efforts on the “big fish” (companies with hundreds of millions in sales), but they are now finding that the smaller companies with fewer resources available for tracking and monitoring transactions are highly profitable targets as well.
Many companies are finding that the audits aren’t always “fair” either. Even though your customer may be tax exempt, the state may still assess you for the uncollected taxes if you do not have the exemption certificate on file.
There have also been many cases across the nation where a state has assessed both the vendor and the customer for uncollected taxes along with penalty and interest!
The auditors are also taking aggressive positions on the types of goods and services that are subject to the tax. Most states consider services to be exempt from the sales tax, but the rules are sometimes nebulous at best and must cover thousands of different types of transactions.
Since the rules are so vague, many companies actually pay more in sales taxes than they should. Guess what? Your friendly sales tax auditor will not likely look for or inform you of any instances of overpayment.
You will definitely be informed of any underpayments, however in the form of an assessment with penalty and interest. The audit period will generally cover prior years as well, so the penalty can be quite substantial.
What You Can Do Now
If you feel that your company has some risk in terms of sales tax compliance, the time to act is now. By being proactive, you can avoid much of the anxiety and potential liability that comes with an audit.
Obtain exemption certificates now for those customers that are exempt. Go through your own records in detail and list any purchases or sales where you feel you may be at risk or where you suspect you may have overpaid.
If you are uncertain, call us. The state is much more likely to be lenient if you file amended returns now instead of waiting for the tax man to knock at your door.
This tax season is an important one for many business owners because it’s the first that will be impacted by the Tax Cuts and Jobs Act (TCJA). How big of an impact is dependent on your unique situation. We’ve compiled this short list of provisions that may affect the business community:
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The combination of running a business and your life and preparing for tax time can drive some people into a slight panic. But no need to get stressed if you are prepared. Now is the time to start organizing all documents required to file your tax return.