What Triggers a Sales & Use Tax Audit?

Last Updated on August 5, 2022

Navigating the sales & use tax audit process can consume a great deal of time and resources, so it pays to know what can trigger an audit and how to prepare if you find yourself facing one. Learn more about the potential causes of sales & use tax audits and what you can do to protect your interests. 

What Is a Sales & Use Tax Audit?

With sales tax making up a substantial portion of a state’s annual revenue, state and local governments want to get their due. In a sales tax audit, state agencies review your sales and purchase documentation against paid taxes to verify that you covered what you owe. 

A sales & use tax audit typically spans the statute prescribed by each state (3 to 4 years) and involves countless transactions for sales and fixed asset and expense purchases. The auditing process may take anywhere from weeks to months depending on numerous factors (number of invoices, incomplete data, auditor/client availability, etc.).

What Causes a Sales & Use Tax Audit?

Generally, a sales & use tax audit occurs when state agencies believe a company failed to report all its taxable sales. However, numerous factors can trigger a sales & use tax audit, with many states having their own systems to flag potential candidates. 

A company with high sales volume, multiple locations or a complex return will naturally trigger a sales tax audit, as the greater number of sales and moving parts increases the likelihood of a reporting error. Similarly, companies that routinely file late — which can indicate a rush job — will draw more attention. 

Other causes of a sales tax audit can include material changes to a company’s footprint or structure, such as adding a new manufacturing plant or research facility, and conversely declaring bankruptcy or closing a flagship store. A sudden, significant drop in taxable sales is another tax audit red flag, as is a disproportionate number of tax-exempt transactions. Of course, one of the largest triggers for a sales tax audit is previous exposure from the last audit. State auditors do not want to waste their time with companies that are compliant, so a net refund or minimal exposure might keep a company off an audit cycle. A company that owed substantial dollars will almost certainly be on the list for another audit once the statute runs full circle. 

Avoiding these audit triggers can help make your company less tempting. However, even if a business files taxes on time, charts proportionate sales and maintains a steady number of locations, it may still be subject to an audit resulting from a random selection or the presence of another factor the state considers an issue. Since it’s impossible to eliminate this possibility, the best thing a business can do is practice good record-keeping and remain as audit-ready as possible. 

How to Prepare for a Sales & Use Tax Audit

You want to be proactive if you find yourself facing a tax audit, starting with reaching out to an audit defense specialist. Sales & use tax consultancy will help you navigate the sales tax audit process from beginning to end, which can include working directly with the auditor, re-examining the audit sample, scrutinizing and decreasing the assessment, identifying credits to offset the liability and negotiating terms to close out the audit. 

Working within the parameters you set, the specialist will help collect and organize all documents and financial data required for the audit. They will also help you detect any errors or missing information in your filings, so you can disclose these issues to the auditor upfront, as well as gain approval for credits or overpaid/over-accrued sales & use tax. 

One of the best things you can do to help expedite your audit and streamline the process is remain polite and respectful. Your auditor is a professional with a job to do, and the audit can move faster by cooperating and only supplying the information they require.  

Navigate Your Sales & Use Tax Audit With TaxMatrix

TaxMatrix excels in sales tax audit defense. When you engage our services, we’ll represent your interests versus the State to ensure you pay only your fair share — nothing more.

If you’re facing the sales tax audit process and don’t know where to start, connect with our experts for assistance.