Many issues can easily trip up companies as they deal with the complexity of the state and local sales/use tax laws and can lead to unexpected exposures. Here are the top ten audit issues (not in any particular order of importance) we see most often when working with our clients.
10 Common Audit Issues for Businesses
- Reliance on invalid exemption certificates and therefore exempting sales from sales tax to customers erroneously. In most states, the state can assess the seller for the tax, and it may be difficult or impossible to recover tax from customers.
- Incorrect application of tax on items sold. (Out-of-date taxability matrices or flags or misinterpretation of the tax laws for new category of sales)
- Application of incorrect tax rates.
- Misapplication of special or reduced rates. (Example: Tennessee local option and single article rules).
- Overpayment of use tax on purchases due to error by the company in assuming tax is due on everything not taxed by a vendor. A company self-assesses tax on all items where tax is not charged and is probably paying tax on exempt items or may even be paying tax on tax already charged.
- Underpayment of use tax on purchases due to error by the company in assuming sales tax is properly invoiced by all vendors. Some vendors may not be registered to collect in a jurisdiction, and the company is neglecting to analyze and self-assess use tax each month.
- Over- or underpayment of use tax on purchases due to not keeping up with taxability of items purchased, leading to either under or over accrual of use tax.
- Errors in preparation, filing and payment of monthly, quarterly or annual sales/use tax returns. This could be caused by employee turnover, lack of competency, systems problems or reliance on outdated and inaccurate reporting procedures.
- Nexus issues regarding whether the company has sufficient presence in a jurisdiction to require registering for sales/use tax. For sales taxes, the nexus bar is rather low. Generally any property, inventory, employee or agents of the company located in or performing business in a jurisdiction will usually give the company sufficient nexus.
- Sampling issues. States are relying more frequently on statistical sampling in audits, especially for companies with voluminous records. Often audits can be adjusted by changes in the sample method, checking for calculation errors and reasonableness tests.