Sales and Use Tax Audits

As many states begin to look for ways to boost revenues, state tax departments are increasingly looking at enforcement of current tax laws and making sure that taxpayers are in full compliance with paying their tax obligations using sales and use tax audits.  One of the tax streams that states are looking at is sales and use tax.

Revenues from states and use taxes are based on two different concepts.  When a company has a business transaction that is subject to sales tax within a state, it is responsible for collecting the sales tax from the consumer of the taxable good or service.  When a consumer within a state purchases a taxable good or service outside of state they reside in, they are responsible for paying a use tax.

Sales Tax Audits

Sales Tax Audits are done primarily to make sure that an organization is collecting and paying the sales tax owed to the state when a taxable transaction occurs.  A sales tax auditor will look at several different factors in determining if an organization is compliant in both the collections and paying of any sales tax that may be due, including:

• Comparing total sales revenue with sales that resulted in the collection of sales tax
• Sales per income tax versus sales per sales tax returns
• Reviewing sales tax payable against the sales tax that was actually paid

In addition, a sales tax auditor may also do spot reviews of transactions to verify if they meet a definition of a transaction that should have resulted in the collection of sales tax.  Any transactions that may meet this definition may be further reviewed to make sure that sales tax was both collected from the consumer, and remitted to the state as required.

One of the challenges that many businesses face when dealing with sales tax collection, especially when doing business in multiple states, is the concept of “nexus”.  Generally, when a company has no nexus within a state, it is not liable for the collection of sales tax when a sale occurs within a given state with sales tax.  Nexus occurs when a company has a physical presence within a state, and the resulting presence may cause the company to be liable for the collection of sales tax.  Many states are “bending” the definition of nexus in order to expand sales tax revenue. Something as simple as attending a trade show in a state that results in future sales can be seen as establishing nexus, and thus may make a company liable for the collection of sales tax.  The advent of the internet, and the resulting explosion of internet sales has also had the effect of states looking further into how to make sure that these transactions result in the collection of sales tax.

Use Tax Audits

Use Tax Audits are a review of transactions that may occur that result in a use tax liability.  Use taxes are collected when a business uses, stores, or consumes inventory or goods that have been previously considered exempt from sales tax. This includes any goods that may have been purchased out of state.

During a Use Tax Audit, an auditor is going to look at the sales tax that a company has paid for purchases, any accrued use tax the company has recorded, and verify that any exempt purchases have all been paid correctly during a given time period.   Companies that face Use Tax Audits should be sure that these 3 components, if they are a part of their business operations, are effectively recorded for each type of these transactions.

Because of the complexities of Sales and Use Tax Audits, it is important that your organization be well-prepared by implementing pre-audit procedures that will ensure a successful audit.  Click here to read more about how a tax attorney might be able to assist you in your sales or use tax audit. A qualified tax lawyer that is familiar with Sales and Use Audits can make sure your organization will pass any audit examination. Feel free to contact our Irvine tax attorneys, or our San Diego tax attorneys to help assist you in these matters or call us at 619-595-1655.