Sales tax compliance audits can be painful, time-consuming, and potentially expensive for your business. Wouldn’t it be nice if, just once, before an audit began, you could sit down across the table from an auditor to pick their brain about sales tax compliance strategies?
That’s what we’ve done. We interviewed four former state auditors with decades of experience in both the public and private sectors about their best tips for sales tax compliance.
Here’s their friendly advice –
1. Always Get the Basics Right – Calculations and Reports
This may seem like a no-brainer, but companies often get into trouble or complicate the audit process with basic errors in calculating or reporting sales and use tax. Once an auditor starts seeing these mistakes, it signals them that they need to probe further, which can dramatically change the audit process.
In case of any doubts, please seek sales tax audit help to asses your tax liabilities and to avoid further complications. A former California state auditor says that companies don’t always get in trouble because they manage sales tax incorrectly but instead because they can’t produce reports that prove they’re doing it correctly. Retaining internal tax return worksheets that substantiate the source of reported figures is essential.
2. Be Consistent, every time
Inconsistent accounting practices give auditors reasons to investigate further. They will want to know why you had one workflow for determining tax compliance on one set of transactions but a different workflow for another.
These inconsistencies can creep in for the most innocent of reasons. Perhaps your accounting manager was out for a few months, so you brought in a temp who used a slightly different accounting method. Or perhaps you’ve adopted new accounting software or even a new e-commerce platform that generated different reports. It pays to do your internal audit whenever one of these events occurs.
3. Find Your Problems Before the Auditors Do
Conducting a pre-audit or reverse audit before receiving a notice from a state allows you to identify and correct your errors. You could have your team handle it, but outsourcing this task to a consultant has advantages, as you’re bringing in a fresh perspective. Either way, catching and correcting your errors is worth the effort and can pay off in reduced future penalties, making a difference for partners and investors.
4. Focus on Use Tax
Mismanaging use tax is one of the most costliest compliance mistakes companies make. State auditors say they’re the No. 1 audit risk, and bulk assessments often result from unpaid use tax. Specific industries – namely manufacturing, construction, and hospitality – face even more significant risks because the use tax rules for those businesses are more complex and vary from state to state.
How you “consume” specific items in your business is often a determining factor. Common triggers include, but are not limited to –
- Inventory transfers
- Promotional giveaways (which can include free samples to customers)
- Charitable donations
- Purchases of fixed assets where the vendor did not collect tax
- Withdrawal of inventory for interval research and development (in certain states)
5. Reduce Manual Processes
Relying on institutional knowledge and manual processes often leads to errors, mainly when staff turnover occurs. That can be costly: The average cost of an auditor is more than $3000,000, according to Wakefield Research.
Automating your compliance functions eliminates much of the laborious work associated with sales and use tax management – and it can help protect against adverse audit findings. Automated solutions also improve efficiency by assessing, calculating, and accruing sales and using tax when initially processing invoices. LA tax lawyers are instrumental throughout the process in resolving issues and addressing sales audit tax compliance.
