Tax Tip of the Week | 5 Ways to Fail a Sales Tax Audit

IRS audits are horrible! Sales tax audits are worse. In some areas, a sales tax auditor has more legal authority than an IRS agent. Yes, that is scary! Some businesses think that it is not a big deal failing to collect sales tax from a “favorite” customer since the customer would be liable anyway in an audit. It is not that easy – the sales tax agent collects this shortfall from whoever they are auditing. You might be paying the sales tax for your “favorite” customer. Good luck trying to get those dollars back from them.

The article below is advertising from an Avalara blog. I do not know anything about Avalara other than this tongue in cheek article which makes a lot of sense at least from my experience over the years.
                                                      By Mark Bradstreet

 FROM THE AVALARA BLOG JANUARY 23, 2019

 “All businesses relish a good sales tax audit. After all, what’s not to like? And did you know it’s possible to spend more time, money, and resources than absolutely necessary during an audit? It’s true. Simply follow the five tips below and you’ll dramatically increase your chances of having to pay those coveted audit penalties. 

[From the Avalara blog.]

1. Give the auditor a hard time

Spare no inconvenience. Send the auditor on coffee runs. Set the auditor up in your most cramped and unappealing space then make the auditor sort through the messiest records. First impressions matter when it comes to audits, so make yours a terrible one. The harder the experience for the auditor, the more likely that auditor will help you spend more money, resources, and time.

2. Assume you don’t need to collect tax

This is a high-risk move. If you have nexus in a state, you’re required to collect and remit sales tax; and while nexus used to refer primarily to some sort of physical presence, that’s no longer the case.

On June 21, 2018, the Supreme Court of the United States ruled physical presence is not a requisite for sales tax collection. Since the decision in South Dakota v. Wayfair, Inc., more than 30 states have broadened their sales tax laws to include a business’s “economic and virtual contacts” with the state, or economic nexus. That trend is likely to continue until all states with a general sales tax impose a sales tax collection obligation on remote sellers.

If you want to ensure you run afoul of auditors, just keep on not collecting in states where you make significant sales: Tax authorities are looking for you; they’ll likely find you.

3. Put your exemption certificates in a box in the warehouse

This gives you two advantages. First, it forces the auditor to dig through a potentially rat-infested box for the records needed, thus wasting more time. Second, it increases your chances of losing certificates to flood, fire, or vermin.

If you don’t have a complete certificate that proves a customer is exempt, you’ll owe the state for the sales tax you didn’t charge — plus bonus penalties and interest.

4. Keep incorrect records

You want to fail a sales tax audit? Make sure your records don’t match your bank accounts. If you have more or less money in your account than shows up on your sales tax records, you’re begging for an audit penalty.

If incorrect records are too blatant for your taste, strive for incomplete records. Don’t stress about recording every cent of sales tax charged to your customers. Scribble sales tax records down on a sheet of paper so you’ll never know where to find them when you need them. The auditor will linger as long as there’s a clear discrepancy between how much you collect and how much you record.

5. Pay less than you owe

This one’s about your overall method. You can drastically increase your risk of penalties during an audit by manually managing sales tax. Paying less sales tax than what your business owes will substantiate incorrect record-keeping, shoddy certificate storage, and (purposeful) ignorance about nexus. Plus, think of all of the other opportunities for error that await when you manually manage the following:

•    State and local jurisdiction rate changes
•    Filing methods and schedules for each taxing jurisdiction
•    Changing product taxability rules

But seriously

We know you don’t actually want to waste time, money, and resources. So, hopefully these tips give you some ideas of what not to do.

The right technology can turn sales tax management from painful and risky to easy and more accurate. Avalara’s suite of solutions can reduce your risk by automating calculations, certificate management, timely filing, and easy-to-access reports.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week