The Sales Tax Audit Process

Being Located Outside the State Will Not Save You

Most businesses do not realize the state has offices located across the country to audit out-of-state companies. In late 2018, more than 2,500 online retailers received audit notices from California CDTFA alone. Florida Department of Revenue has auditors based in Atlanta, Chicago, Dallas, Houston, Los Angeles, New York, and Pittsburgh. Texas has nearly one fifth of its 600-plus auditors based outside its borders.

States also leverage information-sharing networks to coordinate nationwide audits: the Midwestern States Association of Tax Administrators, the North Eastern States Tax Officials Association, the Southeastern Association of Tax Administrators, and the Western States Association of Tax Administrators.

The Real Cost of a Sales Tax Audit

A recent Avalara study showed that hiring a professional, paying tax, penalty, and interest can easily exceed $100,000. The average sales tax audit costs around $115,000 — not including the cost of future compliance. Both the audit itself and future compliance can be significant expenses, and hiring a professional upfront generally saves money in both the short and long term.

Pre-Audit Planning

The first step when you receive an audit notice is not to panic. There is typically a statutory grace period before the audit begins — do NOT waive it. Use this time to get your records organized.

The state will often send a questionnaire claiming you must fill it out. While required in some states, it is not required in most. Answer only what is legally required.

Hire Your Audit Manager Early

When you receive the initial notice, hire your audit manager as quickly as possible. Whether internal or external, one person should communicate with the auditor — and no one else. They coordinate all responses and serve as the single point of contact.

The auditor is not your friend. Treat the relationship professionally. Be respectful, courteous, and honest — but do not volunteer more than necessary.

If no one internally is well-versed in sales and use tax, hiring an external professional is the right move. Sales Tax Helper acts as the liaison between your company and the state auditor — and has the credibility to say we do not know and will get back to you in a way that is believable and tactically advantageous.

Pre-Audit Diagnostic: Know Your Problems Before the Auditor Does

Before the audit begins, conduct a pre-audit diagnostic to identify areas of concern. Compare yearly sales tax returns against annual federal tax returns — unreconciled discrepancies will be treated as unreported taxable sales. Pre-audit at least one month of exempt sales to verify you have proper documentation on file. Review your sales tax payable account and confirm it reconciles to your payments. Analyze whether sales tax was paid on fixed asset purchases. Locate key expense accounts representing taxable purchases and confirm tax was paid.

Where Should the Audit Take Place?

When Sales Tax Helper is on your team, we arrange for the audit to take place electronically or at our office — not yours. We strongly advise against allowing an auditor into your business.

By keeping auditors out of your offices, all record requests go through us. Your staff stays focused on your business, and the auditor does not go on a fishing expedition for issues outside the scope of the audit.