Businesses face heavy assessments from sales and use tax audits
July 15, 2015
By Keith J. Habel, CPA, Partner, SALT Practice Leader
State Departments of Revenue are becoming increasingly aggressive in sales and use tax audits. Businesses of every size are at risk. Why? Simply put, because States are broke. Pursing additional revenue from businesses who improperly pay (or don’t pay) sales and use tax is easy money. As a matter of fact, in a recent survey of 140 executives from Global 2000 companies, 83 percent of them had experienced an increase in the number of audits due to state and local tax revenue shortfalls.
In particular, the Departments of Revenue are focusing on companies that currently do not file use tax returns. What is use tax? In general, use tax is imposed after the sale takes place and only on goods and services that have not yet been subjected to sales tax. In most cases, these are purchases made from out-of-state suppliers not collecting state sales tax for the state in which the purchase is consumed.
If a supplier provided a taxable service or sold goods which are subject to sales tax but did not charge the purchaser sales tax, the Department of Revenue will assess the first party they audit, whether it is the buyer or the seller. When a company is audited, in most cases, they face not only an assessment, but will also owe interest from the day the item is purchased. If a business has filed a use tax permit, the auditors will usually go back three years. Typically, they will go back 10 years for businesses that have not filed a use tax return (although they can technically go back to the day a business was established).
Not only do tri-state businesses need to worry about the Departments of Revenue from Iowa, Illinois and Wisconsin but other states are also trying to get a piece of the revenue. The rules of multiple states get convoluted for business owners who are unsure of whether they have nexus or a filing requirement in any other states.
Here are some action steps a business can take to be proactive about the growing number of state audits:
- Although a business may not be required to file a sales tax return, all Iowa-based companies should still apply for a state consumers use tax permit.
- To attempt to limit the audit period which the State can audit and assess taxes, a business should file quarterly use tax returns with the state in which it is domiciled. (This may not necessarily prevent a business from facing the unlimited look back period for an audit.) Use “good faith” when completing the use tax return.
- Establish internal procedures for filing use tax returns correctly
- Review all invoices to verify the correct sales tax was paid; if not, consider whether a use tax needs to be paid.
- Determine the states in which you may have nexus. Determine is you are you required to file sales and use tax returns, income or payroll tax returns in any of those states.
If a business is facing an assessment, immediately call a state and local tax (SALT) advisor. He or she has the experience and up-to-date knowledge to be able to determine whether or not the assessment is accurate. In many cases, the assessment is excessive, and an SALT advisor can appeal on your behalf. In addition, many businesses pay sales tax on products and services that are tax-free. A SALT advisor can review your invoices and find possible exemptions. He or she can also assist you in setting up accounting controls to insure compliance with the sales and use tax regulations and safeguard against your company erroneously paying sales and use taxes.
Sales and use tax laws are constantly changing, and state auditors are becoming increasingly aggressive at collecting revenues. A business should get in front of this issue before it sneaks up behind them in the form of heavy, unexpected assessments.
Copyright © 2011 Honkamp Krueger & Co., P.C. All Rights Reserved
This article was previously published in the November 2011 Tri-State Business Times.