Sales and Use Tax Audits Uncovered

Transcription

1 Sales and Use Tax Audits Uncovered

2 Agenda About Andy Johnson and Peisner Johnson & Co. Overview of audit research and analysis Common compliance errors Most common industries targeted Best practices for audit defense Q&A

3 Who Are We? Founded in 1992 Registered CPA firm State & local taxes only Former state auditors & other professionals Consult in all states & Canada

4 Andrew H. Johnson,

5 Research Overview Using extensive data acquired from the Texas Department of Revenue and the California Board of Equalization (BOE), this report aims to shed light on the following: Most common industries that get audited Most common compliance errors by business type or industry Sample audit outcomes across various industries Typical costs in audit penalties and fees, and audit support and defense

6 Methodology Request of information from the Texas Department of Revenue - received sales and use tax audit data spanning Analysis includes a breakdown of approximately 64,000 audits with 4,252 currently in progress. Includes supplemental findings from the California State Board of Equalization s most current ( ) Annual Report

7 Key Takeaways

8 Who gets audited?... and why? Why do some companies get selected while others don t? Companies are not selected at random: Industry Past audit history Volume of sales a company reports to the state Volume of exempt sales claimed Ratio of exempt sales to total sales

9 Who gets audited?... and why?

10 Who gets audited?... and why?

11 Top ten areas of non compliance

12 Compliance errors by key industries Retail and ecommerce Manufacturing Wholesale / Distributor Construction / Contractor Others to consider

13 Retail and ecommerce Audit Triggers: errors in product taxability failing to remit in states where nexus is established

14 Retail and ecommerce The role of Nexus Don t always have to be physically present in a state. Remote staff, using a drop shipper, even attending trade shows, can establish nexus in many states. More than 20 states have enacted click-through or affiliate nexus laws 13 states have either enacted or are in the process of enacting economic nexus laws, whereby companies that generate at least $250,000 in sales are obligated to collect and remit sales tax.

15 Manufacturing Audit Triggers undocumented exempt sales failure to remit use tax failure to remit in states where nexus is established

16 Wholesale / Distributor Audit Triggers failing to remit in states where nexus is established errors in product taxability failure to follow correct drop shipping rules

17 Wholesale / Distributor Working with a Drop Shipper Knowing what documentation you need to maintain for which states becomes a major challenge especially as ship-to destinations may vary widely if your customer, the distributor, has you ship to their customers in numerous states.

18 Construction / Contractor Audit Triggers errors in use tax remittance errors in product taxability failing to remit in states where nexus is established

19 Best Practices for Audit Defense

20 Notification letter Managed audit possible? Why it could be good for you Audit

21 Sampling Issues Carefully evaluate sample method o Block sample, statistical sample, stratified Difficult to change later Tip: watch out for samples that o Are not representative of the population o Have extraordinary purchases o Also, make sure to address how to treat credits in the sample

22 Fieldwork Begins

23 Setting Parameters Contact Person is key Understand tax law & policy Understand your business Facilitate information gathering Maintains message consistency Review list of errors and fix quickly

24 Setting Parameters Auditor letter Office policies Office hours Request a copy of all docs auditor makes

25 Working with the Auditor FAQ: what s the best strategy for working with the auditor? Don t go overboard either way Be assertive with things that matter

26 Fixed assets Expenses Use tax accruals Sales tax returns Federal tax return What will auditors want to review?

27 Sales Resale and exemption certificates o Low hanging fruit o Inflate assessments What will auditors want to review?

28 Communicate Did your vendors: Pay through audit? Did your customers: Pay through audit? Remit as use tax? Have an exemption certificate?

29 Credits & Refunds Auditors don t automatically look for refunds Most auditors consider credits the taxpayer s responsibility You should review your purchases to determine if you overpaid tax during the audit period Deficiency interest is higher than credit interest

30 Outsourced Refund Review Second set of eyes Great tool anytime, but especially after notice of audit or during the audit Looking at potential exposure as well as missed credits and overpayments

31 Auditor Negotiations Discuss with auditor what has been found and why Request copy of law for items that you do not agree with or understand TIP - Extraordinary items may be removed from the sample

32 What If I Don t Agree with the Audit?

33 The Appeals Process Exit conference with auditor Meeting with auditor supervisor or manager Independent audit review Official protest Mediation Administrative hearing

34 Penalty & Interest Waiver Interest waiver rare o Extraordinary delay o Written documentation of erroneous advice Penalty waiver not as rare o First audit o Tax collected not remitted o On-time filing

35 Statute Waiver What should you do if an auditor asks for a statute waiver?

36 What Should You Do? Perform Self Audit Appeals Process Penalty Waiver Pre-audit Mid-audit Post-audit Certificates! Look for Refunds

37 If You Don t Have the Time or Resources to Do a Self Audit We have: A rates database Sampling expertise & software The necessary tax experience The time Relationships with the state More cost effective for PJCo to do this for you

38 Important Points Under Audit Ok to take aggressive positions Not Under Audit Be conservative Aggressive positions can lead to the greatest tragedy in sales tax

39 Not Currently Under Audit What should you do? Nexus Refund review Use tax accrual process Exemption and resale certificate management

40 How do states find you? Auditing your customers Information sharing with other states Special task forces Leads o Former employees o Competitors

41 Exemption & Resale Certificates Have a system in place prior to audits Be proactive in acquiring certificates Consider outsourcing

42 Use Tax Accrual Process Out-of-state purchases generally will not have tax charged, auditors know this, can be large dollars An automated system may be needed when there are many transactions to be accrued

43 The Document You Should Not Give an Auditor at the Start of the Audit

44 How Can We Help You? State tax refund reviews State tax audit defense Text Nexus determination and mitigation Compliance services

45 Guaranteed Accurate For as long as you are a customer of Avalara AvaTax, if you ever suffer a negative audit finding and financial loss related to an inaccurate result returned by the Avalara service, we will pay your uncollected tax, penalty and interest, or refund your prior 12 months service fee, whichever is lower. Making sales tax less taxing.

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47 How can Avalara help? AvaTax user CPA Calculate the right tax rate every time for every sale Get ahead of sales tax risk for your clients Easily track, validate, and store exemption and resale certificates Be proactive and trusted advisor in all areas of state and local tax Transfer tax data instantly for faster, easier returns filing Know whether clients are at risk of non-compliance Reduce manual workload of sales tax management Be a part of a growing CPA community Learn more and experience AvaTax here: Get started: (206) Making sales tax less taxing.

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