Red flags that trigger a sales tax audit

Your Guide to State, Local, Federal, Estate + International Taxation

A 2022 survey of business that had been audited in the last 18 months revealed just how much businesses stand to lose on audits, why they are audited, and the most likely state to get an audit notice from. Here are some red flags that trigger a sales tax audit.

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Why are sales tax audits conducted?

The top reasons why sales tax audits occurred:

  1. Use tax not being self-accrued
  2. Missing resale certificates
  3. Not charging tax on taxable products
  4. Missing sales tax permit
  5. Calculating tax incorrectly

Where to sales tax audits occur most?

Prior to the Wayfair case in 2018, the chance of receiving an out-of-state audit notice was quite rare. Now, the script has been flipped with 41% of businesses surveyed audited by their home state, while 45% of businesses had an audit from out-of-state.

In particular, seven states made up 60% of out-of-state audits:

  1. California
  2. New York
  3. Alabama
  4. Arizona
  5. Colorado
  6. Georgia
  7. Texas

The top in-state audits were:

  1. California
  2. Alabama
  3. Texas

How much can a sales tax audit cost me?

Unfortunately, many business owners tend to bury their head in the sand until it is too late. Many don’t realize just how expensive an audit can be until they are in the midst of one, with the average sales tax audit costing a business $114,147! This is from having to pay the original sales tax out-of-pocket, paying a failure to file fee, paying a failure to pay fee (yes, this is addition to the failure to file fee – crazy, right?) and interest on the amount due – not to mention the time and money spent on having to redirect efforts of business owners and employees focusing on addressing the audit.

A quick example: Let’s say you have sales tax nexus in California and made $100,000 in taxable sales on which you failed to collect, file and remit. On average, if the tax rate due is 9%, you’d owe $9,000 in back tax, plus $900 for both the failure to file and pay fees (10% each) plus interest (10%) which can compound and accumulate quickly, bringing the total to $11,700.

But for many businesses, the amount can be much worse. Why? Because many businesses have sales tax nexus in multiple states, going back several years, resulting in more tax, more fees and more interest.

Solution?

All of this headache and out-of-pocket money and time can be avoided by doing preemptive work. You should always register for sales tax where you have nexus. Henry+Horne can work with your business to review your nexus footprint, overall risk and come up with an action plan that makes the most sense given your current situation.

Consult with a tax advisor that has experience handling state and local tax matters to make sure you and your business stays compliant. For any questions or concerns, please contact Brian Ess, J.D.; BrianE@hhcpa.com; (480) 483-1170.