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Common Errors That Trigger Sales and Use Tax Audits

Posted by Alita Stratton, CPA on Jan 13, 2020 12:52:00 PM

For many business owners, state sales and use tax obligations regarding nexus have never been clear-cut. For example, when should use tax be collected, and whose responsibility is it—the buyer or the seller? Meanwhile, states have only increased their scrutiny of these taxes by ramping up audit activity to find new sources of revenue.

Additionally, in one of the most highly anticipated U.S. Supreme Court decisions in 2018, the Court’s ruling in South Dakota v. Wayfair opened the door for states to require internet retailers to collect sales tax. In doing so, the Court reversed a 50-year-old law that barred states from imposing sales tax on out-of-state purchases.

With state audits of sales and use tax filings on the rise, the last thing business owners want to do is attract the attention of taxing authorities by making careless mistakes. You may be audited at some point, but there is no need to flag your business.

  • Forgetting (or not knowing) to pay use taxes – If you have tangible personal property not subject to sales tax, you are responsible to account for use tax—unless you have an exemption. The same holds for products purchased from outside the state. For a long time, use tax was only associated with the buyer; however, state governments hold the sellers responsible when it is not paid. It is important to understand use tax and consider implementing a tax policy for your business that will help you track sales and use taxes.
  • Math mistakes or inattention to detail
    • Simple calculation errors
    • Writing the incorrect number in a blank space
    • Rounding up or averaging dollars to the nearest hundred or thousand
  • Lack of/outdated exemption and/or resale certificates

It is the seller’s responsibility to make sure the buyer is permitted tax-free status. Be sure to provide resale certificates to your suppliers and vendors and renew certifications. For example, if the product your company sells is used by other companies in the production of their products, you would not have a requirement to register for sales tax, but you would want to secure exemption certificates from your customers. You may want to consider automation software to track certificates.

  • Using incorrect rates

There are roughly 11,000 sales tax jurisdictions in the U.S., and rate changes are common. It’s not uncommon for 500-plus sales and use tax rate changes to be made by state taxing authorities each year. Each state and locality has its own laws and practices when it comes to sales tax administration, audit, enforcement and notice of rate changes. You must keep track of these changes, register in each of the states in which you conduct business and pay the correct taxes to those states. Again, automated software can help you keep track of rates and rules.

  • Filing sales tax returns reporting zero use tax

States can run queries to identify companies that do not report any use tax. With many retailers based online, there are many sellers that may not be registered to collect sales and use tax in your state. States expect some level of use tax reporting periodically.

Remember, nexus is defined differently by each state. Since Wayfair added economic nexus to physical nexus, it is critical for businesses to work with their accounting professionals to use the appropriate tax software to track different definitions and requirements among hundreds of U.S. taxing jurisdictions. If you have an online business the burden of tax compliance increases.

Our free e-book, “The Changing Sales and Use Tax Environment,” details how the Wayfair Supreme Court case has changed tax collection requirements and what constitutes nexus. The e-book also outlines errors that trigger audits and how to manage the process should your business be audited.

Contents include:

  • Nexus Rules: What Has Changed?
  • 3D-book_Sales-Use-Tax (ID 147069)What to Do if You Are Audited
  • Case Study on an Audit Assessment

You may download our new e-book by completing a brief form.

The State and Local Tax Team at Goldin Peiser & Peiser works with business owners to conduct multistate sales and use tax reviews. Our priority is to minimize penalties through proactive state tax planning that can help you leverage savings opportunities. If you face an audit, we take steps to mitigate your tax liability and, in most cases, act as your trusted agent, working directly with state officials.

For more information, please contact Alita Stratton, CPA, at (972) 818-5300.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.

Topics: Sales Tax, Use Tax, Sales Tax Audit