Sales Tax Statute of Limitations

How Far Back Can They Go?

For most states, the lookback period is 3 to 4 years from the later of: when the return was filed, when payment was made, or when the return was due.

Critical exception: If your business has never filed a return, there is effectively an infinite lookback period. If you have nexus with a state and have been in business for more than 3 to 4 years without filing, you should strongly consider a Voluntary Disclosure Agreement to limit your exposure.

Tolling: Pausing the Clock

Tolling is the legal term for pausing or freezing the statute of limitations. In many states, the SOL is paused during the audit period to give the auditor time to complete their work.

For example, a 3-year lookback audit notice received today might give the auditor an additional year to complete the audit. If the auditor fails to complete the audit within the tolling period, the SOL begins running again and some or all of the audit period may be cut off.

The Verizon Case: $3.17 Million Wiped Out

A Florida case illustrates just how powerful the SOL can be. The Florida Department of Revenue issued an audit notice to Verizon in January 2007 for the preceding three years. Through a series of extensions, the deadline was extended to March 2011. The Department issued a proposed assessment in February 2011 — but the court ruled that a proposed assessment is not a final assessment.

Because the final assessment was not issued before the extension expired, the court ruled the entire $3,169,168.74 assessment was time-barred by the statute of limitations. The full amount was void.

Should You Sign a Statute of Limitations Extension?

The state will often ask you to extend the SOL to allow the auditor more time to complete the audit. Whether you should sign is not a simple yes or no.

If you refuse, the auditor will typically estimate the tax due — often inflated. If you cooperate, you may get a more accurate assessment but also give up the SOL defense.

Your audit manager should evaluate the full situation before making this decision. Having a sales tax professional on your side for this specific question alone can be worth thousands of dollars.