Sales Tax Audit Checklist: Prep & Avoid Issues

Sales tax is a complex and ever-changing topic for online sellers. If you sell to customers in different states, you need to comply with various sales tax laws and regulations. Failing to do so can result in costly penalties, interest, and even legal action.

One of the most dreaded scenarios for online sellers is facing a sales tax audit. A sales tax audit is when a state tax authority reviews your sales records and transactions to verify that you have collected and remitted the correct amount of sales tax. Sales tax audits can be stressful, time-consuming, and expensive, especially if you are not prepared.

How to Figure Out Sales Tax for Online Businesses (Complete Guide)

Sales tax audit preparation checklist: triggers, cost, requirements, duration, penalties and resolution tips to avoid any challenge

To help you avoid or minimize the impact of a sales tax audit, we have created this sales tax audit checklist. This checklist will cover the following topics:

• What is a sales tax audit and how does it work?
• What to expect from a sales tax audit and what will they look for?
• How to prepare for a sales tax audit and what documents and records you need?
• What triggers a sales tax audit and how to reduce the risk of being audited?
• What are the common sales tax audit penalties and what to do if you fail an audit?

By following this checklist, you will be able to understand your sales tax obligations, stay organized, and respond effectively to any audit inquiries. Let’s get started!

What is a sales tax audit and how does it work

A sales tax audit is a formal examination of your sales tax records and transactions by a state tax authority. The purpose of a sales tax audit is to ensure that you have complied with the state’s sales tax laws and regulations, and that you have collected and remitted the correct amount of sales tax.

A sales tax audit can be initiated by various factors, such as:

• Random selection by the state tax authority
• Customer complaints or referrals
• Discrepancies or errors in your sales tax returns or payments
• Nexus changes or expansion of your business activities
• Participation in tax amnesty programs or voluntary disclosure agreements

A sales tax audit can be conducted in different ways, such as:

• Desk audit: The state tax authority requests you to send your sales tax records and documents by mail or electronically for review.
• Field audit: The state tax authority sends an auditor to your business location or office to examine your sales tax records and documents in person.
• Joint audit: The state tax authority collaborates with other states or jurisdictions to conduct a multi-state or regional audit of your sales tax records and documents.

What are the steps involved in a sales tax audit process

A sales tax audit process typically involves the following steps:

• Notification: You will receive a letter from the state tax agency informing you that you have been selected for an audit. The letter will also include the audit period, the scope of the audit, the records requested, and the contact information of the auditor assigned to your case.
• Preparation: You will need to gather and review the relevant records for the audit period, such as sales and purchase invoices, sales and use tax returns, exemption certificates, bank statements, financial statements, and shipping documents. You may also want to consult with a tax professional, such as a CPA, a sales tax expert, or a SALT (state and local tax) specialist, to help you with the audit process.
• Examination:The auditor will examine your records and compare them with the sales tax you reported and paid to the state. The auditor will look for any discrepancies, errors, or omissions that may indicate underpayment or overpayment of sales tax. The auditor may also ask you questions about your business operations, sales tax policies, and accounting methods.
• Conclusion:The auditor will issue a report summarizing the findings and adjustments of the audit. If the auditor determines that you owe additional sales tax, you will receive a notice of assessment with the amount due, including interest and penalties. If the auditor determines that you overpaid sales tax, you will receive a notice of refund with the amount to be refunded. You will have the opportunity to review the report and agree or disagree with the audit results. If you disagree, you can appeal the audit within a certain time frame and follow the state’s appeal procedures.

What is a reverse sales tax audit

A reverse sales tax audit is a process where a taxpayer or their representative reviews their own sales tax compliance to identify and recover any overpayments of sales tax. 

Unlike a regular sales tax audit, where the state tax agency examines the taxpayer’s records to find any underpayments of sales tax, a reverse sales tax audit aims to find any overpayments of sales tax that the taxpayer can claim as refunds or credits

How long does a sales tax audit

A sales tax audit can last from a few weeks to several months, depending on the scope, size, complexity of the business, and findings of the audit. During the audit, you will need to provide the auditor with access to your sales tax records and documents, answer any questions, and cooperate with any requests. 

According to some sources , a sales tax audit for a small business typically lasts around three months, and a sales tax audit for a global or multi-state company may take two years or longer. However, these are only general estimates, and the actual time frame of a sales tax audit may differ from case to case. To reduce the length of a sales tax audit, you should prepare well in advance, cooperate with the auditor, and resolve any issues or discrepancies as soon as possible.

At the end of the audit, the auditor will issue a report with the audit results, findings, and recommendations. If the auditor determines that you owe additional sales tax, interest, or penalties, you will receive a notice of assessment or deficiency. You will have the option to pay the amount due, request a payment plan, or appeal the audit decision.

Factors that affect the duration of a sales tax

1. The audit period: The audit period is the time frame that the auditor will examine your records and transactions. The audit period may range from one year to several years, depending on the state and the audit criteria. The longer the audit period, the more records and transactions the auditor will have to review, and the longer the audit will take.
2. The audit scope: The audit scope is the extent and depth of the audit. The audit scope may cover all or some of your sales and purchases, all or some of the states where you have nexus, and all or some of the sales tax issues or topics. The broader the audit scope, the more records and transactions the auditor will have to examine, and the longer the audit will take.
3. The audit issues: The audit issues are the problems or discrepancies that the auditor will find or investigate in your records and transactions. The audit issues may include missing or inaccurate invoices, unreported or underreported sales, incorrect or inconsistent tax rates, invalid or unsupported exemptions, or other errors or omissions. The more audit issues the auditor will encounter, the more questions and explanations the auditor will have to ask and verify, and the longer the audit will take.
4. The audit cooperation: The level and quality of your audit cooperation with the auditor. The audit cooperation may involve providing the requested records and information, answering the auditor’s questions, resolving any disputes or disagreements, and agreeing or appealing the audit results. The more cooperative you are with the auditor, the smoother and faster the audit will go, and the shorter the audit will take.

What to expect from a sales tax audit and what will they look for

A sales tax audit can be a daunting and intimidating process, but knowing what to expect and what the auditor will look for can help you prepare and respond effectively. Here are some of the common aspects of a sales tax audit and what the auditor will focus on:

• Nexus: The auditor will verify that you have nexus, or a significant connection, with the state that is conducting the audit. Nexus can be established by various factors, such as having a physical presence, employees, inventory, affiliates, or economic activity in the state. The auditor will also check if you have nexus with other states or jurisdictions that may require you to collect and remit sales tax.
• Registration: The auditor will verify that you have registered as a sales tax vendor with the state and obtained a sales tax permit or license. The auditor will also check if you have registered with other states or jurisdictions where you have nexus and are required to collect and remit sales tax.
• Collection: The auditor will verify that you have collected the correct amount of sales tax from your customers based on the state’s sales tax rate, rules, and exemptions. The auditor will also check if you have collected sales tax from customers in other states or jurisdictions where you have nexus and are required to collect and remit sales tax.
• Remittance: The auditor will verify that you have remitted the sales tax that you have collected to the state on time and in full. The auditor will also check if you have remitted sales tax to other states or jurisdictions where you have nexus and are required to collect and remit sales tax.
• Reporting: The auditor will verify that you have filed your sales tax returns with the state accurately and timely. The auditor will also check if you have filed sales tax returns with other states or jurisdictions where you have nexus and are required to collect and remit sales tax.
• Records: The auditor will verify that you have maintained complete and accurate sales tax records and documents for the audit period. The auditor will also check if you have retained your sales tax records and documents for the required retention period.

How to prepare for a sales tax audit 

One of the best ways to handle a sales tax audit is to prepare for it in advance. By keeping your sales tax records and documents organized and up-to-date, you will be able to respond to any audit inquiries quickly and efficiently. Here are some of the steps that you can take to prepare for a sales tax audit and the documents and records that you need:

• Review your sales tax nexus: Review your business activities and operations in each state and determine where you have nexus and are required to collect and remit sales tax. Keep track of any nexus changes or expansions that may affect your sales tax obligations.
• Review your sales tax registration: Review your sales tax registration status and ensure that you have obtained a sales tax permit or license from each state where you have nexus and are required to collect and remit sales tax. Keep copies of your sales tax permits or licenses for reference.
• Review your sales tax collection: Review your sales tax collection practices and ensure that you have collected the correct amount of sales tax from your customers based on the state’s sales tax rate, rules, and exemptions. Keep track of any sales tax changes or updates that may affect your sales tax collection.
• Review your sales tax remittance: Review your sales tax remittance practices and ensure that you have remitted the sales tax that you have collected to each state where you have nexus and are required to collect and remit sales tax. Keep track of your sales tax payments and receipts for reference.
• Review your sales tax reporting: Review your sales tax reporting practices and ensure that you have filed your sales tax returns with each state where you have nexus and are required to collect and remit sales tax. Keep track of your sales tax returns and confirmations for reference.
• Review your sales tax records: Review your sales tax records and ensure that you have maintained complete and accurate sales tax records and documents for the audit period. The audit period is usually the last three to four years, but it can vary depending on the state and the circumstances of the audit. Some of the sales tax records and documents that you need to keep include:

What are the requirement, documents and records you need for a sales tax audit

• Sales and use tax records: These include your sales and use tax returns, payments, receipts, confirmations, notices, correspondence, and any other documents related to your sales and use tax obligations.
• Purchase and expense invoices: These include your purchase and expense invoices, receipts, statements, and any other documents that show your purchases and expenses for your business.
• Sales invoices and receipts: These include your sales invoices, receipts, statements, and any other documents that show your sales and revenue for your business.
• Resale and other tax exemption certificates: These include your sales tax exemption certificates, forms, and any other documents that show that your customers are exempt from sales tax or eligible for a reduced sales tax rate.
• Inventory records: These include your inventory records, reports, and any other documents that show your inventory levels, costs, and movements for your business.
• Employee compensation records: These include your employee compensation records, reports, and any other documents that show your employee wages, salaries, benefits, and taxes for your business.
• Gross receipts: These include your gross receipts, reports, and any other documents that show your total sales and revenue for your business.
• Bank statements and reconciliations: These include your bank statements, reconciliations, and any other documents that show your bank transactions and balances for your business.
• Shipping documentation: These are documents that show the origin, destination, and delivery of your shipped items, such as bills of lading, packing slips, and delivery receipts. The auditor will use the shipping documentation to determine the situs (location) of your sales and purchases and to verify the sales tax nexus and jurisdiction of each transaction.
• Federal and state income tax returns: These are forms that show your income, deductions, credits, and tax liability for the federal and state governments. The auditor will use the federal and state income tax returns to reconcile your gross sales and net income with your sales tax returns and financial statements.
• Depreciation schedules: These are records that show the cost, useful life, and depreciation method of your fixed assets, such as equipment, furniture, and vehicles. The auditor will use the depreciation schedules to determine if you have reported and paid sales tax on any sales or purchases of fixed assets during the audit period.

How long do you have to retain invoice for a sales tax audit

You should also retain your sales tax records and documents for the required retention period, which is usually three to four years, but it can vary depending on the state and the circumstances of the audit. You can store your sales tax records and documents in paper or digital format, as long as they are accessible, legible, and reliable. 

What triggers a sales tax audit and how to reduce the risk of being audited

A sales tax audit can be triggered by various factors, some of which are within your control and some of which are not. While you cannot completely eliminate the risk of being audited, you can reduce the risk by following some best practices and avoiding some common mistakes. Here are some of the factors that can trigger a sales tax audit and how to reduce the risk of being audited:

• Random selection: Some states use random selection methods to choose which businesses to audit, based on factors such as industry, size, location, or frequency of sales. While you cannot prevent this type of audit, you can be prepared by keeping your sales tax records and documents organized and up-to-date, and by responding promptly and professionally to any audit inquiries.
• Customer complaints or referrals: Some states rely on customer complaints or referrals to identify potential sales tax violations or discrepancies. Customers may report you to the state tax authority if they suspect that you have charged them the wrong amount of sales tax, or if they have not received a proper sales receipt or invoice. To avoid this type of audit, you should always provide your customers with clear and accurate sales receipts or invoices, and communicate with them about any sales tax issues or questions.
• Discrepancies or errors in your sales tax returns or payments: Some states use automated systems to compare your sales tax returns and payments with your sales data and other sources of information, such as third-party marketplaces, payment processors, or tax agencies. If the state detects any discrepancies or errors in your sales tax returns or payments, such as underreporting, overreporting, late filing, or late payment, it may trigger an audit. To avoid this type of audit, you should always file your sales tax returns and pay your sales tax on time and in full, and reconcile your sales data and records with your sales tax returns and payments.
• Nexus changes or expansion of your business activities: Some states monitor your business activities and operations to determine if you have nexus, or a significant connection, with the state that requires you to collect and remit sales tax. If the state notices any changes or expansions in your business activities, such as opening a new location, hiring employees, storing inventory, or making sales, it may trigger an audit. To avoid this type of audit, you should always keep track of your nexus status and obligations, and register, collect, and remit sales tax in any state where you have nexus.
• Participation in tax amnesty programs or voluntary disclosure agreements: Some states offer tax amnesty programs or voluntary disclosure agreements to encourage businesses to come forward and resolve their sales tax liabilities, without facing penalties or interest. While these programs can be beneficial for businesses that have not complied with their sales tax obligations, they can also trigger an audit. The state may audit your sales tax records and transactions to verify the accuracy and completeness of your disclosure and payment. To avoid this type of audit, you should always be honest and thorough in your disclosure and payment, and cooperate with any audit requests.
• Compliance history: If you have a history of sales tax compliance issues, such as late filings, late payments, penalties, or previous audits, you may increase your risk of being audited again, as the state tax agencies may consider you a repeat offender or a high-risk taxpayer.
• A high number of refunds or credits: If you have a high number of refunds or credits on your sales tax returns, you may draw the attention of the state tax agencies, as they may wonder if you have overpaid or underpaid your sales tax liability or if you have claimed any improper or fraudulent refunds or credits.
• High ratio of exempt sales: If you have a high ratio of exempt sales to total sales, you may raise the suspicion of the state tax agencies, as they may question the validity of your exemptions and the documentation of your exempt transactions.
• High volume of sales or purchases: If you have a high volume of sales or purchases, especially across multiple states or jurisdictions, you may attract the attention of the state tax agencies, as they may suspect that you have a higher potential for sales tax errors or noncompliance.

What are the common sales tax audit penalties

If you fail a sales tax audit, meaning that the auditor finds that you owe additional sales tax, interest, or penalties, you may face serious consequences. Depending on the state and the severity of the audit findings, you may be subject to the following sales tax audit penalties:

• Interest: Interest is the amount that you owe for the late payment of sales tax. Interest rates vary by state and are usually calculated based on the state’s prime rate or statutory rate. Interest accrues from the date that the sales tax was due until the date that the sales tax is paid in full.
• Penalties: Penalties are the amount that you owe for the violation of sales tax laws or regulations. Penalties vary by state and are usually calculated based on a percentage of the sales tax due, a flat fee, or a combination of both. Penalties can be imposed for various reasons, such as:
  • Failure to register as a sales tax vendor
  • Failure to collect sales tax from customers
  • Failure to file sales tax returns
  • Failure to pay sales tax
  • Failure to maintain sales tax records
  • Failure to cooperate with an audit
  • Fraud or negligence
• Liens: Liens are legal claims that the state places on your property or assets to secure the payment of your sales tax debt. Liens can affect your credit score, your ability to sell or transfer your property or assets, and your access to financing or loans. Liens can be placed on various types of property or assets, such as:
  • Real estate
  • Vehicles
  • Equipment
  • Inventory
  • Bank accounts
  • Accounts receivable
• Levies: Levies are legal actions that the state takes to seize your property or assets to satisfy your sales tax debt. Levies can result in the loss of your property or assets, or the reduction of your income or cash flow. Levies can be applied to various types of property or assets, such as:
  • Real estate
  • Vehicles
  • Equipment
  • Inventory
  • Bank accounts
  • Accounts receivable
  • Wages
  • Commissions
• Revocation: Revocation is the cancellation or suspension of your sales tax permit or license by the state. Revocation can affect your ability to operate your business legally and effectively, and expose you to further penalties or legal action. Revocation can be imposed for various reasons, such as:
  • Failure to register as a sales tax vendor
  • Failure to collect sales tax from customers
  • Failure to file sales tax returns
  • Failure to pay sales tax
  • Failure to maintain sales tax records
  • Failure to cooperate with an audit
  • Fraud or negligence

What to do if you fail a sales tax audit

If you fail a sales tax audit and receive a notice of assessment or deficiency, you have the option to do the following:

• Pay the amount due: You can pay the amount due, including any sales tax, interest, or penalties, to the state by the due date specified in the notice. You can pay the amount due in full or request a payment plan from the state. Paying the amount due will stop the accrual of interest and the imposition of further penalties or legal actions.
• Request a payment plan: You can request a payment plan from the state to pay the amount due in installments over a period of time. You will need to provide the state with information about your financial situation and ability to pay, and negotiate the terms and conditions of the payment plan. You will also need to comply with the payment plan and any other sales tax obligations to avoid defaulting on the payment plan and facing further penalties or legal actions.
• Appeal the audit decision: You can appeal the audit decision to the state if you disagree with the audit findings, calculations, or conclusions. You will need to file a formal appeal with the state by the deadline specified in the notice, and provide evidence and arguments to support your appeal. You will also need to follow the appeal process and procedures of the state, which may involve administrative hearings, judicial reviews, or alternative dispute resolutions. Appealing the audit decision will suspend the collection of the amount due until the appeal is resolved, but it will not stop the accrual of interest or the imposition of further penalties or legal actions.

How to avoid sales tax penalties

Sales tax penalties are additional charges that the state tax agency may impose on you for failing to comply with the sales tax laws and regulations. Sales tax penalties can be costly and damaging for your business, so it’s important to avoid them as much as possible. Here are some tips to help you avoid sales tax penalties:

• Know your sales tax obligations: The first step to avoid sales tax penalties is to know your sales tax obligations, such as which states you have nexus in, which transactions are taxable or exempt, how much sales tax you need to collect and remit, and when and how you need to file and pay your sales tax returns. You should also keep up with the changes in the sales tax laws and regulations, as they may affect your sales tax obligations and compliance.
• Use automation tools: The second step to avoid sales tax penalties is to use automation tools, such as sales tax software, platforms, or apps, that can help you with your sales tax compliance. Automation tools can help you calculate sales tax, file sales tax returns, manage exemption certificates, and track nexus and taxability. Using automation tools can help you save time and money, reduce errors and risks, and improve accuracy and efficiency.
• Review and audit your records: The third step to avoid sales tax penalties is to review and audit your records regularly, such as your sales and purchase invoices, sales and use tax returns, exemption certificates, bank statements, financial statements, and shipping documents. You should also reconcile your records with your sales tax returns and payments, and identify and correct any errors or omissions in your records. Reviewing and auditing your records can help you ensure that your records are accurate and complete, and that they match with your sales tax compliance and liability.
• Seek professional advice: The fourth step to avoid sales tax penalties is to seek professional advice from a tax professional, such as a CPA, a sales tax expert, or a SALT (state and local tax) specialist, especially if you have complex or uncertain sales tax issues or questions. A tax professional can help you understand and comply with the sales tax laws and regulations, advise you on the best practices and strategies for sales tax compliance, and represent you during a sales tax audit or appeal.

How much does a sales tax audit cost?

The average range cost of a sales tax audit varies significantly based on some factors. However, on average, small to medium-sized businesses might face audit costs ranging from $5,000 to $30,000 or more. Larger corporations undergoing complex audits can experience costs exceeding $100,000.

Factors that determine sales tax audit costs

Several elements contribute to the overall cost of a sales tax audit

1. Scope and Complexity: The size and complexity of a business directly impact audit costs. Larger companies or those with intricate sales structures often face higher expenses due to the extensive review required.
2. Frequency and Compliance History: Businesses with past compliance issues or irregularities might face more frequent or intensive audits, potentially increasing overall costs.
3. Duration and Resources: The length of the audit and the number of resources (auditors, specialists, etc.) involved significantly affect expenses.
4. State-Specific Regulations: Each state in the US has its own tax laws and regulations. Complying with different state requirements during an audit might lead to additional costs.

Sales tax audit defense

Sales tax audit defense is the process of protecting your rights and interests during a sales tax audit by the state. Sales tax audit defense can help you reduce or eliminate any sales tax liabilities, interest, or penalties, and avoid or minimize any adverse consequences, such as liens, levies, or revocation.

You can defend yourself or hire a professional to defend you during a sales tax audit. The strategy and outcome of your sales tax audit defense will depend on various factors, such as the state, the auditor, the audit type, the audit scope, the audit findings, and the audit recommendations.

To defend yourself during a sales tax audit, you will need to follow these steps:

• Respond to the audit notice: You will need to respond to the audit notice that you receive from the state tax authority, and confirm your contact information, your availability, and your cooperation. You will also need to review the audit notice carefully, and understand the audit type, the audit scope, the audit period, and the audit procedures.
• Gather your sales tax records and documents: You will need to gather all your sales tax records and documents for the audit period, and organize them in a clear and logical manner. You will also need to review your sales tax records and documents, and identify any potential issues or discrepancies that may arise during the audit.
• Communicate with the auditor: You will need to communicate with the auditor throughout the audit process, and provide the auditor with access to your sales tax records and documents, answer any questions, and cooperate with any requests. You will also need to maintain a professional and respectful tone, and avoid any confrontations or arguments with the auditor.
• Negotiate with the auditor: You will need to negotiate with the auditor if you disagree with any of the audit findings, calculations, or conclusions. You will need to provide evidence and arguments to support your position, and seek a reasonable and favorable resolution. You will also need to document any agreements or settlements that you reach with the auditor, and obtain a written confirmation from the auditor.
• Appeal the audit decision: You will need to appeal the audit decision if you are not satisfied with the outcome of the audit or the negotiation. You will need to file a formal appeal with the state tax authority, and follow the appeal process and procedures of the state. You will also need to prepare your case and present your evidence and arguments to the appeal authority, and seek a reversal or a reduction of the audit decision.

Sales tax audit attorney

A sales tax audit attorney is a legal professional who specializes in sales tax law and representation. A sales tax audit attorney can help you with various aspects of sales tax audit defense, such as:

• Advising you on your sales tax obligations and compliance
• Preparing you for the sales tax audit and the audit process
• Representing you during the sales tax audit and the communication with the auditor
• Negotiating with the auditor on your behalf and seeking a favorable resolution
• Appealing the audit decision and representing you during the appeal process

Hiring a sales tax audit attorney can have several benefits, such as:

• Saving you time and money by handling the sales tax audit for you
• Protecting your rights and interests by advocating for you
• Reducing your stress and anxiety by providing you with guidance and support
• Increasing your chances of success by leveraging their expertise and experience

However, hiring a sales tax audit attorney can also have some drawbacks, such as:

• Costing you fees and expenses for their services
• Losing control and involvement in the sales tax audit process
• Facing potential conflicts or disagreements with the attorney

Therefore, you should carefully weigh the pros and cons of hiring a sales tax audit attorney, and consider factors such as the complexity, the severity, and the potential outcome of the sales tax audit, as well as your budget, your preference, and your confidence in handling the sales tax audit yourself.

Business owners’ rights during a sales tax audit process

As a business owner, you have certain rights and responsibilities during a sales tax audit process. You have the right to:

• Receive a clear and timely notice of the sales tax audit, and understand the audit type, the audit scope, the audit period, and the audit procedures
• Request a reasonable and convenient time and place for the sales tax audit, and reschedule or postpone the audit if necessary
• Be represented by yourself or by a professional, such as an accountant, a lawyer, or a tax consultant, during the sales tax audit
• Receive a fair and impartial treatment by the auditor, and be treated with respect and courtesy
• Ask questions and seek clarifications from the auditor, and receive clear and accurate answers and explanations
• Provide feedback and comments to the auditor, and express your opinions and concerns
• Review and verify the audit findings, calculations, and conclusions, and dispute or challenge any errors or discrepancies
• Negotiate and settle any sales tax liabilities, interest, or penalties with the auditor, and seek a reasonable and favorable resolution
• Appeal the audit decision and seek a reversal or a reduction of the audit decision

You also have the responsibility to:

• Comply with your sales tax obligations and regulations, and register, collect, and remit sales tax in any state where you have nexus and are required to collect and remit sales tax
• Maintain complete and accurate sales tax records and documents, and retain them for the required retention period
• Respond to the audit notice and confirm your contact information, your availability, and your cooperation
• Provide the auditor with access to your sales tax records and documents, and cooperate with any requests
• Communicate with the auditor throughout the audit process, and answer any questions
• Pay any sales tax liabilities, interest, or penalties that you owe to the state, or request a payment plan
• File a formal appeal with the state tax authority, and follow the appeal process and procedures of the state

Difference between sales and use tax audit

Sales tax and use tax are two types of taxes that are imposed on the sale or use of tangible personal property or certain services. Sales tax is collected by the seller from the buyer at the point of sale, and remitted to the state where the sale occurs. Use tax is paid by the buyer to the state where the property or service is used, consumed, or stored, if the seller did not collect sales tax.

A sales tax audit is a review of your sales tax records and transactions by the state tax authority, to verify that you have collected and remitted the correct amount of sales tax. A use tax audit is a review of your use tax records and transactions by the state tax authority, to verify that you have paid the correct amount of use tax.

The difference between a sales tax audit and a use tax audit is mainly based on the perspective and the purpose of the audit. A sales tax audit is conducted from the perspective of the seller, and the purpose of the audit is to ensure that the seller has complied with the sales tax laws and regulations of the state where the sale occurs. A use tax audit is conducted from the perspective of the buyer, and the purpose of the audit is to ensure that the buyer has complied with the use tax laws and regulations of the state where the property or service is used, consumed, or stored.

However, a sales tax audit and a use tax audit can also be related and interdependent, as they both involve the same transactions and the same parties.

For example, if a seller fails to collect sales tax from a buyer, the buyer may be liable for use tax to the state where the property or service is used, consumed, or stored. Conversely, if a buyer pays use tax to the state where the property or service is used, consumed, or stored, the seller may not be liable for sales tax to the state where the sale occurs. Therefore, a sales tax audit and a use tax audit can affect each other, and the outcome of one audit can influence the outcome of the other audit.

How to audit sales tax

Auditing sales tax is the process of reviewing your sales tax records and transactions to ensure that you have complied with your sales tax obligations. Auditing sales tax can help you identify and correct any errors or discrepancies, avoid or minimize any sales tax liabilities, and prepare for any potential sales tax audits by the state.

You can audit sales tax yourself or hire a professional to do it for you. The frequency and scope of your sales tax audit will depend on your business size, industry, location, and sales volume. However, a general guideline is to audit sales tax at least once a year, or more often if you have significant changes or expansions in your business activities or operations.

To audit sales tax, you will need to follow these steps:

• Gather your sales tax records and documents: You will need to gather all your sales tax records and documents for the audit period, and organize them in a clear and logical manner. You will also need to review your sales tax records and documents, and identify any potential issues or discrepancies that may arise during the audit.
• Review your sales tax nexus: You will need to review your business activities and operations in each state and determine where you have nexus and are required to collect and remit sales tax. You will also need to review any nexus changes or expansions that may have occurred during the audit period and how they affected your sales tax obligations.
• Review your sales tax registration: You will need to review your sales tax registration status and ensure that you have registered as a sales tax vendor with each state where you have nexus and are required to collect and remit sales tax. You will also need to review any registration changes or updates that may have occurred during the audit period and how they affected your sales tax obligations.
• Review your sales tax collection: You will need to review your sales tax collection practices and ensure that you have collected the correct amount of sales tax from your customers based on the state’s sales tax rate, rules, and exemptions. You will also need to review any sales tax changes or updates that may have occurred during the audit period and how they affected your sales tax collection.
• Review your sales tax remittance: You will need to review your sales tax remittance practices and ensure that you have remitted the sales tax that you have collected to each state where you have nexus and are required to collect and remit sales tax. You will also need to review any remittance changes or updates that may have occurred during the audit period and how they affected your sales tax remittance.
• Review your sales tax reporting: You will need to review your sales tax reporting practices and ensure that you have filed your sales tax returns with each state where you have nexus and are required to collect and remit sales tax. You will also need to review any reporting changes or updates that may have occurred during the audit period and how they affected your sales tax reporting.
• Reconcile your sales tax records and transactions: You will need to reconcile your sales tax records and transactions with your sales data and other sources of information, such as third-party marketplaces, payment processors, or tax agencies. You will need to identify and resolve any discrepancies or errors, such as underreporting, overreporting, late filing, or late payment, and adjust your sales tax returns or payments accordingly.
• Document your sales tax audit findings and recommendations: You will need to document your sales tax audit findings and recommendations, such as any errors or discrepancies, any sales tax liabilities or refunds, any sales tax changes or updates, and any best practices or improvements. You will also need to keep a record of your sales tax audit process and procedures, such as the audit period, the audit scope, the audit methods, and the audit results.

Can I negotiate with the state to reduce my sales tax audit penalty

If you receive a sales tax penalty from the state tax agency, you may be able to negotiate with the state to reduce or waive your penalty, depending on the circumstances and the state’s policies. Here are some tips to help you negotiate with the state to reduce your penalty:

3 tips to negotiate and reduce your sales tax audit penalty

• Contact the state tax agency: The first step to negotiating with the state is to contact the state tax agency as soon as possible, explain your situation, and request a penalty reduction or waiver. You should also provide any information or documentation that supports your request, such as proof of reasonable cause, hardship, or good faith. Contacting the state tax agency can help you show that you are willing to cooperate and resolve the issue and that you have a valid reason or excuse for your sales tax noncompliance.
• Be honest and respectful: The second step to negotiating with the state is to be honest and respectful with the state tax agency and to avoid any lies, threats, or insults. You should also acknowledge your sales tax noncompliance, take responsibility for your actions, and express your regret and apology for your mistake. Being honest and respectful can help you build trust and rapport with the state tax agency and demonstrate your integrity and sincerity.
• Offer a compromise or a payment plan: The third step to negotiate with the state is to offer a compromise or a payment plan if you cannot afford to pay the full amount of the penalty. A compromise is an agreement where you pay a reduced amount of the penalty in exchange for the state waiving the rest of the penalty. A payment plan is an agreement where you pay the full amount of the penalty in installments over a period of time. Offering a compromise or a payment plan can help you reduce the financial burden and the risk of defaulting on your sales tax debt and show that you are making an effort to pay your penalty

Can I get audited again after negotiating with the state

Yes, you can get audited again after negotiating with the state, but it depends on the terms and conditions of your negotiation. Some states may agree to waive or reduce your penalty in exchange for your consent to waive your right to appeal or challenge the audit results. 

In that case, you may not be audited again for the same year or issue, unless there is evidence of fraud or new information. 

However, some states may not require you to waive your right to appeal or challenge the audit results, or may only waive or reduce your penalty for a limited period of time. In that case, you may still be audited again for the same year or issue, or for other years or issues, if the state tax agency has a valid reason or basis to do so.

Can I refuse a sales tax audit

The short answer is no; you cannot refuse a sales tax audit. If you have been selected for a sales tax audit by the state tax agency, you have a legal obligation to cooperate and comply with the audit process. Refusing a sales tax audit can have serious consequences for your business

What is a statute of limitation for sales tax audit

The statute of limitations is the time limit that the state tax agency has to audit, assess, or collect sales tax from a taxpayer. Generally, the statute of limitations ranges from two to six years, depending on the state and the circumstances of the audit. However, there are some exceptions and factors that can extend or shorten the statute of limitations, such as:

What is the factors that influence the statute of limitations

• Fraud or evasion: If the taxpayer has committed fraud or evasion or has filed a false or fraudulent return, the statute of limitations may not apply at all or may be extended indefinitely. This means that the state tax agency can audit the taxpayer for any period, regardless of how far back it is.
• Underreporting or misrepresentation: If the taxpayer has underreported or misrepresented their taxable sales by a certain percentage (usually 25% or more), the statute of limitations may be extended for an additional period, usually three years. This means that the state tax agency can audit the taxpayer for a longer period than the normal statute of limitations.
• Agreement or waiver: If the taxpayer has agreed to or waived the statute of limitations, either voluntarily or as part of a settlement or compromise, the statute of limitations may be shortened or eliminated. This means that the state tax agency can audit the taxpayer for a shorter period or for a specific period agreed upon by both parties.
• Refund or credit: If the taxpayer has claimed a refund or credit of sales tax, the statute of limitations may be reopened or restarted for the period covered by the refund or credit. This means that the state tax agency can audit the taxpayer for the same period for which they claimed the refund or credit.

Can I get audited by multiple states at once

Yes, you can get audited by multiple states at once, especially if you have a nexus in more than one state. 

How far back can a sales tax audit go

This depends on the state where the audit is conducted, as each state has its own statute of limitations for sales tax audits. 

Conclusion

To wrap up, we’ve covered a lot about sales tax audits, from discussing what a sales tax audit is to the steps involved and all the way to what happens if you don’t pass one.

We explored why businesses get audited, how to lower the chances of being audited, and what you should do to prepare if it does happen. Your rights as a business owner during an audit are essential, and we’ve talked about that too.

We touched on how long an audit takes, the penalties you might face, and the importance of keeping your invoices. 

Knowing the time limit for audits and understanding what auditors look for can make a big difference. Our goal is to empower you with the knowledge you need to handle sales tax audits confidently. If you have more questions or need help, remember that professionals are there for support. Cheers to your success!