Sales Tax Audits On the Rise: How Your Business Can Prepare
With the current economic times, businesses are scrambling to make ends meet and keep the doors open. One of the last things a business needs to worry about is a sales tax audit. However, state taxing authorities are reacting to recent budget shortfalls by increasing their sales tax audit activity and/or sending a nexus questionnaire.
In the ever-changing landscape of sales tax law, many businesses are challenged with understanding where they are required to collect sales tax, which transactions are taxable or how much sales tax to pay. As a result, a business can end up in a situation where a state inquiry leads to a hefty assessment of tax, interest and penalties for not collecting or paying the correct sales tax.
What is a nexus questionnaire?
A nexus questionnaire is a letter or form that the state uses to inquire about the nature and extent of business activities in such state. Once received, it is important to respond to the questionnaire because ignoring the request could lead to an audit. In addition, the company may want to consult with an experienced state and local tax professional to help ensure that the questions are answered appropriately and that nexus is properly determined since state laws for determining nexus and a filing obligation vary by state.
If nexus is determined, how far back can a state assess sales tax?
The state can go back to the date the company triggered nexus (began doing business) in that state since there is no statute of limitations for a non-filer. This can result in a lengthy look-back period and assessments that include back taxes, interest and penalties.
What should a business do if it suspects it hasn’t filed properly in the past?
Most states offer some type of voluntary disclosure (VDA) or amnesty program. These programs encourage a non-filer to come forward and allow for a shorter look-back period, usually three to four years. These programs will typically offer a waiver of penalties and, in some cases, a reduced interest percentage. In some instances, the company can request a VDA on an anonymous basis and work through a consultant who can negotiate with the state to reach the best result for the company.
The key is to stay in front of the state for any past exposure because if a state contacts the business first, these programs are likely not be an option (e.g., the company would be required to pay all back taxes, interest and penalties).
What should a business do if it is notified of an upcoming audit?
Generally, the state will mail a letter to notify the company that it has been selected for a sales tax audit, along with a request for documents. The company should review its records to determine which documents are readily available.
The request for documents can be abundant. The business may want to consult with an experienced state and local tax professional to help ensure that the request for documents is reasonable and make sure that the information that will be provided to the auditor is appropriate.
If the business is concerned that its business records are incomplete or not readily available (e.g., older tax periods are stored on an old computer system), an experienced state and local tax professional can help determine alternative record options. In addition, the consultant can assist the business in setting an audit timeline that will allow the company additional time to gather the applicable records.
Will an auditor scrutinize a company’s records if a third party represents them during an audit?
No, an auditor should not treat the company any differently in this situation. It’s important for the company to reach out to tax professionals who are well versed in the state laws where the business operates. This representation will ensure that the audits are completed in a timely manner and that excessive assessments and unreasonable deadlines are not imposed on the business.
If your business has received a nexus questionnaire or an audit notice, please contact your Brown Smith Wallace advisor and we can assist you through the process.
If you have other questions regarding nexus, VDAs or sales tax issues, please contact Pam Huelsman, Tax Principal and State and Local Tax Practice Leader, at firstname.lastname@example.org or 314.983.1392; Amy Jackson, State and Local Tax Principal, at email@example.com or 314.983.1336; or Bernie Ottenlips, State and Local Tax Principal, at firstname.lastname@example.org or 314.687.2375.