For most businesses the administration of sales and use tax can seem obscure and unimportant, until it’s pushed to the forefront by the receipt of a sales and use tax notice of audit. Unfortunately for the business and its owners, it may already be too late once a notice of audit has been received. If the business has not been proactive in preparing for a potential audit by ensuring policies and procedures are in place to properly document, track and report every sale and purchase taking place during the business’s daily operations, the business may be in for a rude surprise when state auditors show up at the door requesting to review the company’s sales and purchasing records.
Every state that imposes a sales tax has laws on the books that allow state auditors to legally access, review and document a business’s tax accounts to ensure the businesses is in compliance with tax laws. Businesses that are out of compliance may be assessed tax due along with expensive penalties and interest being added on. Business owners may be held personally liable for all assessed tax, penalty and interest, even if business is no longer in operation. States may even file criminal charges against a business owner if fraud is suspected.
Business owners need to understand that sales and use tax collections have become second only to income tax as a source of revenue for most states. In states that do not have an income tax, such as Florida and Tennessee, sales and use tax collections account for as much as 85% of the state’s revenue. If you don’t believe states take sales and use tax enforcement seriously, just ask anyone who has had to endure an audit and they will tell you how difficult, time-consuming and potentially costly an audit can be.
Do you know how auditors determine which business transactions they will examine? Do you have any idea what records the business should be collecting and reviewing before the audit even begins? How about exempt sales the company may have had? Have the tax exempt transactions been properly documented and supported by a customer completed certificate of exemption? Do you understand what to do with a list of compliance errors an auditor has just handed you and then stated that tax is owed on all of them?
If you don’t know the answer to all the questions above, your business may be ill-prepared to undergo an auditing. One of the best things a business can do is be proactive in addressing sales and use issues before a notice of audit is received. Being prepared can not only save the business time and money, it can also help to keep audit assessments to a minimum.