september2021 - 21

FEATURE
How to Help Your Client or
Business Through a Sales
Tax Audit
By Eric Carrasco
TAX LAWS CONTINUE to evolve and add new complexities to business
operations. As a result, stakeholders expect their CPAs or internal tax
professionals to be prepared for anything. However, as most accountants
know, it is impossible to specialize in every area of taxation or
understand the liabilities associated with niche challenges like multi-state
sales and use tax regulations.
One day, you might encounter a sales tax
audit. Understandably, this can be overwhelming
and intimidating to tackle. Here are a few
things to keep in mind as you face this hurdle.
UNDERSTAND WHY BUSINESSES
GET TARGETED FOR SALES TAX
AUDITS
* Rapid Growth. Some businesses unknowingly
neglect their sales tax obligations, especially
during periods of increased sales volume or
while expanding into new states. Not to mention
the physical nexus created by having employees
or contract workers in those locations. These
fact patterns can trigger a state to investigate
proper compliance.
* Customer Sales Tax Audits. If a state audits
your customer and an auditor identifies invoices
that your business improperly taxed or missed,
the state is likely to audit your company.
* Location, Location, Location. Some states are
more aggressive with sales tax audits than
others. States like California often target
small businesses such as Amazon sellers and
eCommerce. New York tends to audit for sales
tax frequently, and Texas for both sales and
franchise taxes. However, nothing is guaranteed,
so it is vital to assess the risk wherever
there is existing or potential nexus exposure.
PREPARE FOR POTENTIAL
LIABILITIES
* Examine the number of sales during the audit
period to see where potential under-collection
might have occurred.
* Review the sales tax returns during the audit
period to ensure sales tax reports reconcile
with the returns.
* Be prepared to answer when things don't line
up. For expenses, make sure to have copies of
invoices, including purchases made with credit
cards. Businesses should generally keep invoice
records for all purchases for at least 3-5 years.
UNDERSTAND STATE-SPECIFIC
SALES TAX AUDIT METHODS
States typically do not audit a company's
entire books and records. Talk to the state
auditor to see what audit method options
are available. Many offer a sampling method
limiting what the state reviews.
While this is usually a safe approach,
audit results for the limited period will be
extrapolated for the entire audit period
upon the conclusion of the audit. Meaning,
if the sample period contains a significant
purchase(s) with missing invoice records or a
sizable sales transaction with erroneous sales
tax, these errors can get magnified.
In addition, while states may allow this
method for sales and expenses, they usually
do not offer the same for their review of fixed
asset purchases.
ESTABLISH PROPER SALES TAX
COMPLIANCE MOVING FORWARD
There's no better time than the present to start
complying. If a sales tax audit exposes underpayments
or under-collections, it's essential to
prioritize compliance moving forward.
* Even if a single state sales tax audit reveals no
violations, be sure to analyze every state for
possible economic and physical nexus exposure.
Monitor changes in employee locations, sales
into new states, and increased transaction
volume. Or have a trusted sales tax partner
conduct routine multi-state nexus reviews to
identify potential red flags.
* Establish a reasonable method to calculate
use tax from expenses where sales tax is
mistakenly absent.
* If necessary, explore software solutions
to automate sales tax calculation with an
understanding that it is not a one size fits all
solution. Implementing sales tax software has
several pros but, without proper expertise
during and after implementation, it can lead to
costly errors - like incorrect product mapping.
* Consider all areas of tax compliance that may
be impacted, like gross receipts, franchise, and
other local taxes.
Before hitting the panic button, consider
these steps and, when necessary,
seek
expert advice to help defend or possibly
minimize the impact of a sales tax audit! ■
Eric Carrasco is manager of indirect tax for the New
York City-based firm PMBA.
SEPTEMBER 2021 ■ www.CPAPracticeAdvisor.com
21
http://www.CPAPracticeAdvisor.com
september2021

Table of Contents for the Digital Edition of september2021
