In business, the possibility of being called upon for a sales tax audit is real. The thought may have crossed your mind and you likely assumed “Yeah, we are prepared.” Perhaps you thought it would be a good idea to tighten up some procedures or spend some time performing your own personal audit on business expenditures to see if the right sales tax is being paid. Did you ever act on it? If not, don’t fret, here is some advice that might help you if you ever find yourself subject to a sales tax audit.
1. Don’t Sit Back
When you are served notice, you will likely be given a list of information that you will need to provide – get on it right away! Do not put this off or waste time working on other priorities.
This IS priority!
It will take you much more time than you think to gather the right information. You will likely find that on certain items you did not charge sales tax or pay sales tax, and you will want to substantiate why you did not. The only way you do this is through documentation, and that takes time to gather.
2. Beware the Consumer Use Tax
Are you aware of the term consumer use tax? That is the tax in which businesses need to pay on items purchased when sales tax wasn’t charged in the first place.
Hold on…who does that?
Unfortunately, not many businesses at all. The danger here is in many sales tax audits, this is the first place auditors look, simply because the hunting grounds are so fertile. And it’s much more common than you might think. Many companies do not charge sales tax on items/products because they do not have to. With an ever-increasing reliance on purchases made online, you are often buying products, merchandise, and raw materials from a company that has no physical presence in your state.
When you get your invoices, you may notice that no sales tax has been charged. Your first reaction may be “Great, score for us! We don’t have to pay sales tax!” But that’s not the case. If the sales tax on that item you purchased is not paid by your company, you are facing a huge liability that could become realized when faced with a sales/use tax audit.
Very often in an audit, the cost to you is not just the sales tax. You need to factor in penalties and an assumption that an invoice occurred each quarter over the time span of the audit period, in which case you’ll pay the sales/use tax on those estimated invoices as well.
Consumer use tax is real and the frequency of your state’s audits are increasing. You need to find a way to identify and calculate your consumer use tax liability and remit to the state. This creates another headache, leading us to…
3. Consider Tax Automation Software
If you use an accounting program like Quickbooks, consider purchasing a license to Avalara. Avalara has a sweet plugin to Quickbooks, which will allow the easy computation of consumer use tax. Avalara will upload this information to their cloud, allow for your review, and lastly remit, and file the use tax liability and tax return at the end of every quarter. Additionally, it does not matter where you have nexus, Avalara can accommodate any jurisdiction that you do business in. It is really a great program, which will alleviate the worry over consumer use tax or sales tax.
With a little preparation and a lot of patience, you too can survive a sales tax audit.
This guest post is provided by Balance Point co-founder Jess Cary. Jess offers this advice to businesses who are dealing with a sales tax audit based on his first-hand experience of the process.